Oil Boom Is Vote Curse for Ghana’s Mills as Cedi Slumps

Ghana’s currency has become a victim of the economy’s success following an oil boom, depreciating the most against the dollar this year in Africa after Malawi’s kwacha and eroding support for President John Atta Mills as he seeks re-election.

The cedi has weakened 14 percent to 1.9098 per dollar since the beginning of January, the fourth-biggest decline in the world, according to data compiled by Bloomberg. By the time Mills and his ruling National Democratic Congress party face voters in a Dec. 7 election, the cedi may be at a record low of 2 per dollar, according to Standard Bank Group Ltd. (SBK), Africa’s biggest lender. 

Ghana’s debut as an oil producer in 2010 fueled the fastest economic expansion on the continent last year, spurring growth in imports of everything from machinery and oil to food, driving up demand for foreign currency and undermining the cedi. Consumers are now paying more for rice, cars, TVs and clothing as inflation soared to a 14-month high of 9.1 percent in April.

“The downside of a weak cedi is rising inflation,” Yvonne Mhango, a Pan-African economist at Renaissance Capital in Johannesburg, said in an e-mail. Growth in consumer prices may accelerate to 14 percent by the end of 2012, implying “there is an upside risk to interest rates, which is negative for credit growth and also raises the government’s debt-servicing costs.”

Re-Election Campaign

Ghana doesn’t have the manufacturing capacity to sustain the needs of an economy that expanded 14.4 percent in 2011 and is forecast by the government to grow 9.4 percent this year. Imports surged 20 percent in the first quarter to $4 billion compared with a year earlier, according to the Bank of Ghana.

Mills’ re-election campaign, which focuses on his economic successes since coming to power in 2008, may be a victim of the cedi’s slump. The president will face New Patriotic Party leader, Nana Akufo-Addo, at the polls after defeating him by less than 1 percentage point four years ago.

“If this government doesn’t do something about the cedi soon it will be bad news for President Mills,” Kofi Manu Asamoah, 52, an importer of spare parts for Mercedes-Benz vehicles, said in an interview from his shop in Accra, the capital. “I am running at a loss because I spend more to buy dollars to pay for my imports,” Asamoah said, leaning against a shelf in his shop that was empty of customers.

With reserves at $4.4 billion, covering about three months of import requirements, the central bank is running out of ammunition to halt the cedi’s decline. Two interest rate increases this year have had limited success.

‘Losing Side’

“The cedi’s situation is hurting us, we are on the losing side,” Kwasi Okoh, managing director of Aluworks Ltd. (ALW), an aluminum-products maker in the port city of Tema, said in an interview on May 8. “We purchase our raw materials in dollars so by the time we have sold our produce we have a shortfall in sales.” Costs have risen by 15 percent in the first quarter, he said.

Ghana’s economy depends on imports for “almost everything from rice to clothing to toothpicks” and rising costs may push up wage demands, Kwabena Nyarko Otoo, director of the labor research and policy institute of the Ghana Trade Unions Congress, said in an interview in Accra on May 17.

“If the cedi continues to fall then we could see some labor agitations for further increases in salaries to restore real income lost to price hikes,” he said.

Rising Costs

The currency’s slump boosted costs at Guinness Ghana Breweries Ltd. (GGBL), a unit of London-based Diageo Plc (DGE) that makes the popular lager beer, Star, by as much as 12 percent in the first four months of the year compared with a year earlier, Anthony Attu, the company’s treasury manager, said in a phone interview from Accra on May 8.

“Our budget this year for the exchange rate was 1.6 per dollar and 2.5 per pound sterling, but these levels have already been broken,” he said.

The election itself is a source of cedi weakness as investors bet the government will struggle to keep spending in check, threatening a repeat of 2008 when pre-vote expenses boosted the budget deficit to 14.5 percent of gross domestic product. The shortfall is expected to reach 4.4 percent of GDP in 2012, according to the government.

“There is a lot of concern among investors and international community as to whether the government will be able to keep within the budget deficit target this year,” James Clinton Francis, a sub-Saharan Africa researcher at Eurasia Group, said in a phone interview from Washington. “The stakes are very high for both parties in the December elections and that gives them the incentive to spend.”

Philomena Annan, a grocer in Bubiashie, a suburb of Accra, is desperate for some relief as costs of staple foods, such as rice, climb.

“We are really suffering now,” Annan, 45, said in an interview on May 8. “I can’t even add profit margins to already high prices. President Mills must do something about the cedi.”

Ghana Cedi is the third worst falling currency in the world

On the 1st of July 2007 which year was also her 50th year of attainment of nationhood, Ghana redenominated  her national currency, the Cedi by knocking off four zeros. Redenomination is the process of changing the face value of banknotes or coins used in circulating currency. It is the process whereby a country's currency is recalibrated due to significant inflation and currency devaluation. In other words, it was an admission that for half a century, Ghana failed to manage her monetary policies and proper economic management. For instance, at the beginning of the year 2000, the cedi was exchanging at 2,500 for US$1. By January 2001, the Cedi had fallen so low it was exchanging at 7,500 for US$1. Thus on July 1, 2007, GHS10,000 was redenominated to GHC1. Getting to the end of 2011, the signs were clear that the New Ghana Cedi was going to suffer another setback in 2012 due to the uncontrolled spending in view of the impending general elections on December 7, 2012. True to that view, Ghana Cedi is suffering under the weight of mismanagement of the economy. 

Ghana’s central bank said it’s supporting the world’s third-worst performing currency against further losses by pushing up Treasury rates to lure investment.

The country’s benchmark 91-day Treasury bill rate rose to 12.35 percent in the March 16 weekly auction, the highest level since October 2010, according to the central bank’s website. It increased to 12.61 percent at the close of the auction today, the highest since August 2010, according to the bank’s data.

“An increase in government borrowing requirements has put some upward pressure on the rates but part of the increases you see are meant to reduce the amount of money in circulation to ease pressure on the cedi,” Grace Akrofi, acting head of research at the Bank of Ghana, said in a phone interview yesterday. “Banks can decide to invest their excess liquidity in dollars, which would weaken the currency, so instead we are trying to attract them to Treasury bills by making adjustments to the rates on offer.”

Ghana’s economy expanded 13.6 percent in 2011 and the Finance Ministry expects a 9.4 percent pace this year after the west African nation’s Jubilee oil field began production for export in 2010. The expansion has spurred declines for the cedi as local producers seek dollars to buy equipment and raw materials. The exchange rate weakened 10 percent against the dollar last year and is down 7.6 percent this year, the biggest drop among 175 currencies worldwide after Iran’s rial and Sri Lanka’s rupee.

The cedi gained for the second straight day, adding less than 0.1 percent to 1.7638 per dollar as of the 4 p.m. close in Accra.

‘Tightening Effect’

The Treasury rate increase may help to ensure that the cedi doesn’t weaken beyond 1.80 per dollar this year, Stephen Bailey- Smith, an emerging-market strategist at Standard Bank Plc in London, said in e-mailed comments.

“Tighter monetary policy -- which you are seeing in the T- bill yields -- will clearly place some pressure on borrowing both on the public and private side of the economy,” he said. “In fact, there is arguably a need to slow down import demand.”

The higher Treasury bill rate “may exert -- over time -- more of a tightening effect, by curbing demand for loans,” Razia Khan, London-based head of Africa research at Standard Chartered Bank Plc, said in an e-mail. “We should expect more policy interest rate tightening from the Bank of Ghana as the treasury bill yields rise.”

The central bank raised its main interest rate by 1 percentage point to 13.5 percent on Feb. 15, the first increase in three years. The decision was intended “to affirm the need to mop up excess liquidity from the system to restrict inflationary pressure as well as the threat by the cedi to weaken significantly,” Akrofi said.

Inflation

Inflation slowed to 8.6 percent in February from 8.7 percent the month before as increases in food prices eased, the statistics agency said March 14. The rate held at 8.6 percent for the three months through December.

The yield on Ghana’s 8.5 percent 10-year Eurobond that matures in October 2017 rose 3 basis points to 5.505 percent today, capping a fifth week of declines.

The cedi declined last year even as the central bank sold $4.1 billion to support it, an increase from $1.7 billion in 2010.

“The currency suffered because the Treasury bill rates were kept low,” Akrofi said.

The 91-day yield may rise further as the Bank of Ghana prepares for its next policy rate decision, “likely to be held in the second week of April,” said Akrofi.

 So what is the risk of this trend? The real implications of the free fall of the New Ghana Cedi and what it means to investors who are owed money in New Ghana Cedis is that their gains are being eroded. In other words, if you have an account, bonds or equity in a bank or a company denominated in the world's third worst performing currency (the New Ghana Cedi), you will be paid in return an amount that is worth toilet paper. Does the fact that you're owed money or have an account in New Ghana Cedis still mean anything? Think of operating a foreign account in order to preserve the value of your money.

Ghana’s Cedi Heads for Longest Losing Streak in Three Months

Ghana's cedi headed for its longest losing streak against the dollar in more than three months as manufacturers and telecommunications companies bought dollars on Monday March 5, 2012.

The currency of the world’s second-biggest cocoa producer depreciated 0.1 percent to 1.7088 per dollar as of 1:37 p.m. in Accra, the capital, a fourth day of declines, the worst run since Nov. 29, 2011 according to data compiled by Bloomberg.

“Manufacturing and telecommunications companies sought the dollar today to import raw material and equipment,” Kobla Nyaletey, a currency trader at the Ghanaian unit of Barclays Bank Plc, said by phone today. “There were no major sellers on the market today.”