As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
Cedi Surges 25%
Ghana’s cedi has surged 25 percent against the US dollar since the beginning of July, the biggest gain on any currency in Africa over the period, reversing almost all of its losses so far this year.
The cedi rally came after the International Monetary Fund (IMF) gave the West African country a positive review of its budget plans and on expectation that a Eurobond sale scheduled for September will boost dollar inflows.
The country is expected to ride the wave of positive investor sentiment after the government successfully negotiated a $918 million aid program with IMF that has boosted economic growth forecasts this year to 3.5 percent and help reduce the budget deficit to 7.2 percent.
“Our analysis suggests that the Ghanaian cedi … depreciation, in the year to May, was overdone,” Yvonne Mhango, an economist at Renaissance Capital’s Sub-Saharan Africa office in Johannesburg said in a recent forecast on eight Sub-Saharan Africa (SSA) currencies, most of which have in recent months come under significant pressure.
Mhango, however, added that she expected the cedi to not last long since the dollar was likely to keep strengthening from the currency level once the US rate hikes begin.
The cedi, a currency that has never gained against the dollar since it was taken off a fixed exchange rate in 1983, was for most of this year considered to be the worst performer among the 24 African currencies tracked by Bloomberg.
It had shed as much as a third of its value at its lowest this year.
With this gain in mind Ghana’s central bank, as widely expected, kept its benchmark interest rate on hold at 22 percent at a rate setting meeting this week.
The Decline
Ghana, which was one of Africa’s economic stars with years of growth above 8 percent boosted by gold, cocoa and oil exports, has since 2014 suffered from fiscal instability as commodity prices fell globally, slowing its economic growth to below the average for sub-Saharan Africa.
A crippling energy crisis that has caused power outages across the country in the last three years has also hurt local enterprises as the cost of doing business shot up.
Ghana’s government initiated a series of measures to deal with the fiscal decay including imposing levies on certain import sectors, eliminating fuel subsidies, raising electricity and water tariffs, raising value-added taxes, rationalizing the bureaucracy, and enacting a tighter monetary policy by raising interest rates.
The country’s Finance Minister Seth Terkper, told the Financial Times that he expected these measures, plus a recent return of donor support and an influx of “seasonal” foreign exchange for Ghana’s leading hard currency earner cocoa, to support the currency going forward.
“But moving forward out of this high point, cedi gains can be sustained because of the measures we are taking,” Terkper said.
“So the short term [issue] is how to manage the seasonability that often comes with the volatilities in commodities prices, which are outside your control. The other short term measure is managing speculation,” he added.
Razia Khan, head of Africa research at Standard chartered Bank told Financial times the cedi gains ” will only have an effect on confidence if it is sustained” and the country maintains a fiscal discipline by adhering to the reforms it set out in the IMF aid program.
“But even this is no watertight guarantee of cedi stability,” she said.
