Strong performance and reversal of losses
The Ghanaian Cedi’s stellar performance in recent months has solidified its position as the best-performing currency against the US dollar. The Cedi has advanced by an astonishing 33% since November 2022, outpacing the vast majority of about 150 other currencies globally. This considerable increase in value has essentially made up for the losses previously suffered, indicating a healthy trend for the Cedi and boosting investor confidence.
Moreover, Ghana’s dollar bonds have proven to be a fruitful investment, yielding a robust return of nearly 12%. This notable performance outshines the average return of 3.6% observed among emerging and frontier market peers, as reported by a reputable Bloomberg index. The strong performance of Ghana’s dollar bonds underscores the belief and optimism in the country’s economy, as investors recognize its potential for growth and stability. Ghana’s local currency bonds have attracted significant investor interest, with foreign holdings reaching a record high of $7.1 billion in March 2023. (Source: Bank of Ghana)
It is worth mentioning that despite the Cedi’s overall positive trajectory, it has experienced a decline of approximately 8.7% against the US dollar since the beginning of the year. However, this decline is relatively smaller compared to the losses witnessed in the interbank market. The Cedi’s ability to weather market challenges and minimise its losses showcases its resilience and highlights its favourable standing compared to other currencies. The Cedi’s reversal of losses is attributed to improved export performance, particularly in the gold and cocoa sectors, which have experienced significant price increases. (Source: Ghana Statistical Service)
These statistics and trends demonstrate the Cedi’s resilience and its ability to rebound from adversity. While the currency has experienced some depreciation in recent months, its overall performance and the reversal of previous losses are indicative of a positive outlook. The stability of the Cedi and its potential for further appreciation will be critical considerations for investors and financial stakeholders to keep an eye on as Ghana continues to manage economic dynamics.
Market sentiment and concerns over spread
The International Monetary Fund’s (IMF) eagerly awaited approval of the $3 billion Extended Credit Facility Arrangement has significantly contributed to the recent appreciation of the Ghanaian Cedi. The market has responded favourably to this encouraging development, which has caused the value of the Cedi to rise noticeably by 1.0% in just one day. The IMF’s endorsement has boosted investor confidence and reinforced positive sentiment surrounding the currency.
The jump in foreign exchange reserves, which reached $11.4 billion in March 2023 and served as a safety net against future currency instability, was a reflection of the upbeat market attitude surrounding the Cedi (Source: Bank of Ghana). The fact that Ghana’s currency has demonstrated comparatively stable behaviour since March 2023 adds to the optimistic atmosphere. The Cedi’s exchange rate against the US dollar has fluctuated between 11.7 Cedis to the US dollar and 11.9 Cedis to the US dollar over this time. This consistent performance has added to the bullish market attitude and is seen as a favourable indicator of the currency’s continued strength.
Analysts, however, are concerned about the Cedi’s spread between the buy-side and sell-side. The apparent mismatch suggests that traders are more likely to buy US dollars at lower rates while showing resistance to sell Cedis at similarly attractive pricing. Asymmetry in traders’ desire to purchase and sell the Cedi and a widening of the buy-side and sell-side spreads on the currency market (Source: Economist Courage Martey, Joy Business) are both highlighted by the increase in these spreads. The spreads now stand at an average of 10-15 pip. This disparity emphasises that the recent appreciation of the Cedi may be driven more by market sentiment and the impact of news rather than significant improvements in the underlying economic fundamentals.
While the IMF’s approval and positive market sentiment have undoubtedly contributed to the Cedi’s recent gains, it is essential to monitor the alignment of these developments with tangible economic indicators. The concerns over the spread between the buy-side and sell-side indicate that caution is necessary when assessing the sustainability of the Cedi’s appreciation. Continual evaluation of the economic landscape will be vital in determining whether the recent market sentiment can be supported by substantive improvements in Ghana’s economic fundamentals.
It is to Ghana’s credit that market sentiment has been influenced by the successful implementation of economic reforms, leading to improved fiscal discipline and a decline in inflation, creating a positive outlook for the currency. As Ghana progresses forward, closely observing the interplay between market sentiment and economic realities will be crucial in understanding the Cedi’s trajectory. By carefully considering the potential impact of these factors, investors and market participants can navigate the financial landscape and make informed decisions regarding their involvement with the Ghanaian currency.
