What is happening to Ghana’s Cedi?
Ghana, the proverbial West African success story has a stock market in the doldrums this year. Primarily driven by the decline in the Cedi, Ghana’s equity market is down -15.2% this year in USD terms. The Cedi meanwhile, is down -19.4% in 2014 alone.
This has been a worsening story since the start of the year, but it has not been highlighted in the same way as Turkey and South Africa’s currency woes have been. This is unfortunate, as Ghana is one of the most important economies in Africa.
Accra’s metropolitan area has 4mm residents, and is one of the most developed capitals in Africa. Abject poverty is difficult to find. Ghana has enjoyed strong economic growth for a number of years; growing 8.8% in 2012, 7.1% in 2013 and a forecast of 7.4% once again in 2014 The country is stable with elections and a comparatively high standard of governance.
What then, has caused the Cedi’s persistent fall?
Let’s start with inflation. Inflation is currently running at 14.5% (as of March 31, 2014) on a one-year basis. Largely driven by a significant rise in energy costs and food inflation. The government’s budget deficit ballooned to 10.8% of GDP in 2013 compared to the government’s target of 9%. Fitch as a result reduced its outlook for Ghana to ‘negative’ and reaffirmed a ‘B’ rating for Ghana. Ghana is having trouble funding its deficit and its one-year yield rose as high as 23%. The deficit is expected to persist till at least 2019.
Ghana’s economy is also increasingly reliant on oil and gold for cash. The Jubilee field continues to expand and may create a situation where Ghana becomes prone to ‘Dutch Disease.’ Gold had a difficult 2013 and a challenging 2014 so far. Ghana’s gold production is on the higher portion of the cost curve and as such many of these mines were struggling for profitability in 2013.
In conjunction, all of this creates a dangerous scenario that precipitated the Cedi’s fall. The Cedi depreciated -16% in 2012, -26% in 2013 and looks set to best that mark in 2014. In February, the Central Bank introduced a series of measures in an effort to reign in the currency’s decline. Sales and purchases must be completed in Cedi, withdrawals are limited to approximately $10,000 and cheques for foreign currency accounts have also been banned. Since this announcement was made, it has no impact whatsoever on the Cedi’s decline.
Until the Ghanaian government is able to reign in its deficit spending, the Cedi is unlikely to appreciate. While this creates an exceptionally difficult situation for the economy as a whole, it does aid export-oriented businesses that benefit from a Cedi depreciation. The market as a whole last year however, had an excellent return (almost 50% in USD terms).
Ghana clearly has a number of challenges it is encountering and this has been illustrated by a weak Cedi. However, it is also important to recognize the investment opportunity present in Ghana. It is a stable country relative to its neighbours and it has very strong growth potential in its future. Given the current uncertainty though, we would recommend being cautious about any allocation targeting Ghana specifically.
We are not optimistic on the Cedi’s appreciation, but a significant depreciation from current levels is not probable in our opinion. The country seems to be growing well and the inflation hit that was borne in 2013 from a rise in energy prices will roll off later this year. As such, we think a sensible investment in an export-focused company (materials, manufacturing) would likely bear fruit at current levels.
Look out for our upcoming ‘How to invest in Ghana’ piece.