The local currency, the cedi, is expected to strengthen against the US dollar for the rest of the year as economic growth outperforms earlier estimates, BMI, the research outfit of rating agency Fitch has predicted.
It is therefore projecting an end-year rate of GH?4.33 against the greenback. For 2018, it is projecting GH?4.19 against the US dollar.
Presently, the cedi is trading at GHC4.39 against the American currency on the interbank forex market and at about GHC4.45 at the forex bureau.
“The cedi is likely to begin a gradual appreciatory trend from H217 (second half of 2017) onwards due to relatively high real interest rate and significant expansion in Ghana's oil and gas production that will support real GDP growth. Given the country's high nominal interest rate, we are forecasting significant strength in total return terms”, BMI stated in its latest report.
Explaining further, the report said “We forecast a gradual short term appreciatory trend for the cedi, expecting the currency to strengthen from its average for the year to date of GHC4.38/USD to an annual average of GH?4.33/USD for the full year”, adding terms of trade will likely improve through 2017, while real interest rates will remain elevated in comparison to the US.
The cedi has since the beginning of 2017 remained relatively stable because of improvement in the macro economic fundamentals of the economy.
In the long term, BMI also said it expects the cedi's depreciatory trend to end, giving way to a gradual appreciatory trend in the years ahead.
This, it noted, will be chiefly due to massive increases in hydrocarbon production which will affect the structural position of the Ghanaian economy, supporting high real yields, adding, “This informs our forecast of a significantly narrowing current account deficit and of real growth averaging a robust 6 percent y-o-y between 2018 and 2026 - almost double the 2016 growth rate. This will also lower the dependence on commodities such as cocoa, which has suffered from structurally lower prices and given Ghana relatively poor terms of trade in recent years.”
On risks, it said “the most significant downside risk to our forecast is if Ghana's disinflationary trend reverses. A key part of our forecast is that real interest rates will remain relatively high compared to the US as inflation in the former continued to fall. Any shock, such as a major outbreak of army worms or a major uptick in the destruction of agricultural land by illegal miners, could see food price inflation interrupt the current disinflationary trend.”
Another potential depreciatory risk it said could come from some difficulty emerging with the IMF over the ECF. “If the facility ends ahead of schedule or if the IMF releases a negative statement on Ghana's finances, this may create depreciatory pressure”, it added.
Meanwhile, BMI is also anticipating continued high real interest rates which it forecasts to remain at or above 6 percent in 2017, while the Bank of Ghana has initiated an easing cycle in recent quarters, cutting by 500 basis points since November 2016.
The Cedi ended 2016 with a depreciation rate of 9.6 percent, trading at GHC4.20 against the US dollar. In the first month of 2017, it also depreciated by 2.80 percent against the US dollar.
Source: The Finder
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