Ghana's Cedi Poised for Rebound: Experts Cite Favorable Factors

Ghana's currency, the cedi, has been facing significant challenges, hitting a new low against the US dollar. However, experts believe the currency is now ripe for a rebound, citing a combination of high interest rates, improved government finances, and strong earnings from the country's gold exports.

Unlocking the Cedi's Potential: Favorable Factors Converge

Interest Rates Provide Cushion

Ghana's central bank has maintained a high policy benchmark rate of 29% since January, even as inflation has cooled to 20.4% from its previous high of 23.5%. This has resulted in positive real, inflation-adjusted interest rates, which are seen as a supportive factor for the cedi's recovery. Strategists believe that the upside potential for the dollar-cedi exchange rate is now limited, as the risks associated with Ghana's economic outlook are already priced in, and the wide and positive real interest rates are likely to persist.

Government Finances Show Improvement

The Ghanaian government has projected a reduced fiscal deficit of 4.2% of gross domestic product (GDP) for 2024, down from the previous estimate of 4.8%. This improved outlook for government finances is seen as a positive development, as it suggests the government is taking steps to address its fiscal challenges. The government's commitment to fiscal discipline and its alignment with growth forecasts from the International Monetary Fund (IMF), which has provided a $3 billion rescue program to Ghana, further bolsters confidence in the country's economic trajectory.

Gold Exports Provide Offset

Ghana's robust gold exports have been a growing source of support for the cedi, helping to offset the disappointing revenue from cocoa shipments that have been affected by unfavorable weather conditions. Strategists believe that the current account surplus is expected to rise, which could ease the pace of the cedi's weakness going forward. The increasing contribution of gold exports to the country's overall trade balance is seen as a positive factor for the cedi's performance.

Inflation Cooling Offers Respite

The decline in Ghana's inflation rate from 23.5% to 20.4% has provided some relief, as it has allowed the central bank to maintain its high policy benchmark rate without the need for further aggressive hikes. This has helped to sustain the positive real interest rate environment, which is viewed as a supportive factor for the cedi's recovery.

Debt Restructuring Underway

Ghana's ongoing debt restructuring process, following its default in 2022, is another factor that could contribute to the cedi's rebound. The successful completion of the debt restructuring, with the support of the IMF's $3 billion program, is expected to improve the country's fiscal position and investor confidence, potentially aiding the cedi's recovery.In conclusion, the confluence of favorable factors, including high interest rates, improved government finances, strong gold exports, and cooling inflation, suggests that Ghana's cedi is poised for a rebound after hitting a new low against the US dollar. Experts remain cautiously optimistic about the currency's upside potential, as the risks associated with Ghana's economic outlook appear to be already priced in, and the positive real interest rate environment is likely to persist.