Ms. Gifty Annor-Sika Asantewah, a Financial Market Analyst and the President of Women In Forex Ghana, has disclosed that the strengthening of the US dollar due to current economic dynamics in the United States will likely extend the recovery timeline for Ghana’s currency, the cedi, and other emerging markets (Ems) currencies.
In an interview with The Vaultz News, Ms. Annor-Sika Asantewah elaborated on the challenges faced by emerging markets, including Ghana, due to their international loan exposures, which must be repaid in US dollars.
In addition, the analyst explained that the ongoing demand for dollars to repatriate profits exacerbates the depreciation of the cedi, making it more difficult for the currency to recover.
“Many governments and corporations in emerging markets borrow in US dollars and Ghana is no exception. When the dollar strengthens, it raises the cost of servicing this debt because more local currency is needed to convert into dollars to meet these obligations.
“Additionally, in Ghana, numerous companies are expatriate-owned, and profits are often repatriated in dollars rather than cedi. This requires exchanging cedi for dollars, which adds pressure to the exchange rate and leads to cedi depreciation.”
Ms. Annor-Sika Asantewah
This situation places additional financial strain on these countries, as they need to allocate more of their already scarce local currency to service their international debts.
Moreover, Ms. Annor-Sika Asantewah noted the strengthened dollar impacts the overall economy by increasing import costs, which can lead to higher inflation.
“For countries heavily dependent on imports, this situation can worsen economic difficulties, making it more challenging for local businesses and consumers to afford goods and services. The dual impact of rising debt servicing costs and higher import expenses places considerable strain on financial stability and economic growth in these emerging markets.”
Ms. Annor-Sika Asantewah
Ghana’s Currency Under Pressure
For the Ghanaian cedi, the analyst warned that the stronger dollar signifies a prolonged recovery period. The cedi has been depreciating rapidly since the beginning of the year following government-implemented reforms favored by the International Monetary Fund and World Bank.
These reforms included the removal of exchange rate support for certain imported commodities and goods, and the introduction of the gold for oil policy, which has exposed the currency to market forces, resulting in an all-time low of over GH¢15 to the dollar.
The forecast for emerging markets is influenced by recent economic data from the US, which showed that the producer price index (PPI) rose higher than expected in February, following an unexpected rise in the consumer price index (CPI). This data suggests that the US Federal Reserve is less likely to cut interest rates soon, which would keep the dollar strong.
The analyst predicted that emerging market currencies, including Ghana’s cedi, will remain under pressure until at least the third quarter of this year. “Ghana and other emerging market currencies are going to be under pressure until at least the third quarter of 2024,” she warned.
Meanwhile, Ms Annor-Sika noted that a strong dollar can also trigger capital outflows from emerging markets as investors seek higher returns in U.S. assets.
“This usually results in the depreciation of emerging market currencies due to decreased demand. For instance, if investors perceive the U.S. economy as outperforming those of emerging markets, they might withdraw their investments from emerging market assets, further weakening the local currencies.”
Ms. Annor-Sika Asantewah
Ms. Annor-Sika Asantewah referenced the 2013 “taper tantrum” as an example of what might happen, noting that when the Federal Reserve hinted at reducing its bond-buying program that year, it led to capital outflows from emerging markets and currency depreciations.
Export Challenges
The analyst emphasized that emerging markets like Ghana rely heavily on exports for economic growth. When the dollar strengthens, emerging market currencies weaken in comparison, making their exports more expensive for foreign buyers. This can lead to “a decrease in export volume or a loss of competitiveness in global markets.”
The analyst further indicated that emerging markets must also brace for inflationary pressures resulting from a weaker local currency.
“A weaker local currency, driven by a strong dollar, can create inflationary pressures in emerging market countries. This occurs because imports become more expensive, raising the prices of imported goods and raw materials. For instance, if the dollar strengthens against the cedi, Ghana might face higher prices for imported commodities, thereby affecting overall inflation levels.”
Ms. Annor-Sika Asantewah
Ms. Annor-Sika Asantewah cautioned that a stronger dollar is challenging for emerging market currencies, as it can lead to economic instability, higher borrowing costs, reduced competitiveness, and inflationary pressures.
“All of this indicates that a stronger dollar poses significant challenges for emerging market currencies. A strong greenback can lead to economic instability, higher borrowing costs, reduced competitiveness, and increased inflationary pressures in Ghana and other emerging countries.”
Ms. Annor-Sika Asantewah
The analyst concluded with a warning that markets should prepare for volatility, as investors are likely to react to potential delays in rate cuts from the Federal Reserve. This volatility could further complicate the economic recovery for emerging markets like Ghana, making it imperative for these countries to implement strategic measures to mitigate the impact of a strong dollar on their economies.
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