Cedi gains ground on debt restructuring talks progressing

The cedi has continued to gain ground in the foreign exchange market, thanks to progress made in negotiations with bilateral creditors.

Available data show that the domestic cedi rallied against its major trading currencies last week on the interbank market. The local unit gained 0.77 percent w/w against the American greenback, ending the week at GH¢10.93 per dollar.

Similarly, the British pound and the euro both lost 0.19 percent week-on-week to the cedi on the interbank market. On the spot market, the cedi gained 5.99 percent w/w against the dollar to trade at GH¢10.85 reducing its year to date (YTD) loss to 1.20 percent.

Aside from the central bank’s interventions and lower demand for the cedi, Constant Capital – a market observer – believes that commitments from the Chinese government to help Ghana restructure its bilateral US$1.7billion debt to the Asian giant also aided in the domestic currency’s recent strength.

Separately, the Bank of Ghana plans to hold its next Bulk Oil Distribution Companies (BDCs) auction on the 13th April, when US$20million will be on offer. Further to this, positive news from the bilateral creditors meeting scheduled for yesterday, April 11, is expected to further support near-term cedi performance.

“We believe that recent strength seen in the cedi will be sustained, possibly improved over the course of the year, on a host of fundamental factors – FX relief from a smoother amortisation under the potentially restructured Eurobonds portfolio, possibly large upfront disbursements under the International Monetary Fund (IMF) extended credit facility programme, and likely expansion of the trade surplus at the central bank,” Constant Capital said.

AZA Finance also shared a similar view that the positive sentiment regarding progress on the debt restructuring programme has supported the cedi. The gains were largely due to the increase in liquidity in the market, following the Bank of Ghana’s intervention with US$3million in the spot market and US$20million for BDCs.

Finance Minister Ken Ofori-Atta remains hopeful that a meeting between the country and China will conclude positively, providing Ghana with enough debt-relief to attain the needed IMF board-level approval. The country is expected to restructure all its debt in the coming weeks to pave the way for the state to submit its economic programme in order to secure the IMF deal by the middle of second quarter 2023.

The progress of negotiations will continue to impact market sentiments, with analysts projecting a mixed performance for the cedi this week.

Market observers have noted that the cedi has performed relatively well despite weak fundamentals. After kicking off the year on a weaker foot against the US dollar and other major trading pairs, the currency’s strong performance has been largely due to anticipated seasonality effects in Q1 2023, amid a weaker foreign exchange reserve position and the highly bearish end to 2022.

However, the Bank of Ghana has tightened market spreads and quelled speculation, which has so far helped to support the cedi’s performance.

Export receipts have also contributed to driving a year-on-year surplus for the merchandise trade account, which has helped to maintain the local unit’s resilience in the foreign exchange market.

The step forward in negotiations with China has brought the country closer to securing IMF Executive Board approval, with official start of the IMF programme expected to unlock a balance of payment backstop to support the currency’s resilience in the second half of 2023.

However, the cedi’s near-term performance hinges on progress made in the country’s external debt restructuring – including securing firm assurances from its bilateral creditors and capital market bondholders, as well as the delayed IMF Executive Board approval for an economic programme.

The cedi’s recent gains have been supported by positive news on the country’s debt restructuring programme and liquidity injections in the foreign exchange market. However, the currency’s long-term resilience will depend on the success of negotiations with China and the IMF, as well as the country’s efforts to restructure its external debt.