The demand for United States (US) dollars has declined considerably at the recent bi-weekly forward forex auction.
Also, this happens to be the lowest bid turnout since the start of the year, causing a shortfall in the central bank’s target. This year, the Bank of Ghana has set a target of US$50 million per forex auction for 2021 Q1.
Generally, the reason for the forex auction is to determine the allocation of a given amount of foreign currency. Usually, this is done through a bidding process. Moreover, it helps to control the circulation of dollars in the economy. Also, Courage Martey, an Analyst and Chief Economist at Databank reveals that this helps to stabilize the Ghana cedi.
A total of 40 bids worth US$33.75 million were submitted by banks for various volumes of dollars. Comparatively, this depicts a shortfall of approximately 32.5% to the stipulated target. Hence, the Central Bank had no option but to accept all bids.
Furthermore, the bid cover ratio has been declining for some time now. It fell from 1.08x at the previous auction to an extreme low of 0.68x. The bid cover ratio considers the dollar amount of bids received at the auction against the amount sold.
According to Will Kenton the bid cover ratio is an indicator of demand and a high ratio depicts a strong demand. Hence, a successful auction is one in which the bid-to-cover ratio substantially exceeds the average of the previous 12 auctions.
Consequently, the average bid cover ratio hovers around an average of 2.5 times for the previous auctions held. As such, a record of 0.68 times reinforces a significant fall in demand for dollars.
“A value [bid cover ratio] of 1 or below signals potential problems in the execution of the auction”
Prof. Zoran Temelkov of Goce Delcev University of Shtip.
Details of the Auction
At the auction, the dollars were ready for delivery in 7-, 15-, 30-, 45-, 60- and 75- days’ time from the central bank. Also, most banks were placing bids for dollars that will be made available within the shortest delivery time. Thus, it signals that investors want the forex they will need for their operations as soon as possible.
Subsequently, 21 bids came in for the delivery of dollars in 7 days’ time at a price ranging between GH¢5.6900 – 5.7450. Also, dollars ready for delivery in 15 days came next with banks submitting 13 bids at a rate of GH¢5.6900– 5.7414.
Only 4 and 2 bids came in for the delivery of dollars in 30- and 45-days’ time respectively. Also, this came at a price ranging between GH¢5.7139 – 5.7450 and GH¢5.6921– 5.6931 in that order.
However, banks did not submit bids for dollars with longer delivery periods including those to be ready in 60- and 75- days’ time.
Above all, this auction’s turn out portrays a decline in investor sentiment on the foreign exchange market. Also, probably investors are unwilling to buy assets priced in US dollars.
So far, the cedi’s performance from last year remains quite impressive. This affirms Analysts’ predictions that the forward forex auctions will play an important role in the cedi’s stability.
