JP Morgan, Global leader in financial services and US firm, has stated that the Bank of Ghana’s decision to purchase dollars from mining and oil companies has unintentionally reduced forex availability within the inter-bank market.

According to JP Morgan, this is one of the reasons behind the fast depreciation of the cedi. In its Emerging Market Quick Take on Ghana cedi’s performance, the Financial Services Firm highlighted that the loss of confidence domestically has resulted in a significant drain from the financial account, even though portfolio outflows have been relatively limited.

“The cedi has now weakened by around 60% against the US dollar this year, as uncertainties about the need for, and extent of, debt restructuring increased. The drain of FX reserves year-to-date means the Bank of Ghana (BoG) now has limited firepower to smooth FX volatility. However, we believe the main trigger for the move to 14.875 (mid) in spot over recent days can be traced to BoG’s decision to purchase dollars from mining and oil companies, inadvertently reducing FX availability within the inter-bank market.”
JP Morgan

Cedi to weaken further

The Firm expects the Cedi to depreciate further despite assessing the country looking quite attractive on its risk-reward scorecard.

“Although the current account deficit (CAD) is only moderately wider, the loss of confidence domestically has resulted in a significant drain from the financial account, even though portfolio outflows have been relatively limited. Based on our risk-reward scorecard, Ghana now looks attractive, but we expect concerns about the scope of debt restructuring to continue dominating, potentially leading to even more GHS weakness, even if an increase in FX forward auction sizes or reversal of the FX purchase policy results in short-term respite for the cedi.”
JP Morgan

JP Morgan further underscored that the Bank of Ghana’s purchase of dollars from mining companies has resulted in a squeeze in the FX market. It explained that while the new FX purchase policy is only a few months old, it has shifted FX away from the secondary market, thus resulting in increased FX pressure.

It noted that the Central Bank has not increased the size of its fortnightly FX forward auctions, where it continues to sell $25 million, despite receiving demand amounting to $100 million per auction.

“To reduce volatility, we believe the BoG may need to use proceeds from mining sector FX purchases to increase interventions, or alternatively, reverse the FX purchase policy. Since the policy was implemented, the central bank reports that it had purchased around $84 million as at End-September [2022] and expects to have purchased $500 million by year-end”.
JP Morgan

Change in FX policy to provide some relief in near-term

JP Morgan emphasized that the recent volatility of the cedi is mostly policy driven and expects medium-term pressure to persist. It however, stressed that a change in FX purchase policy could provide some near-term relief.

Commenting on the country’s international reserves, JP Morgan noted that Gross international reserves have declined to $6.6 billion as at End-September, from $9.7 billion at the start of the year. However, net reserves have declined at a faster pace, reaching $2.7 billion in September 2022, from $6.1 billion in January.

All things being equal, JP Morgan anticipates Gross Reserves to decline to $5.6 billion by the end of this year ($1.6 billion for net reserves), although it expects the disbursement of the $1.1 billion Cocobod syndicated loan should provide a boost to FX reserves.

It also warned that the Bank of Ghana’s decision to purchase most dollars from mining companies may lead to further dampening of confidence and could result in a further acceleration of dollarization and capital flights.