Despite weakening currency, Ghana remains in growth mode

In any given financial market, even when the bias is on the decline, there are always winners and losers.  Even when bad conditions are abundant and uncertainty envelops investor consciousness, a few select entities find a way to outperform the market and shine for all to see.

At present, Ghana is a perfect example of this market reality.  Economic growth for 2012 is currently on track for a 7.5% increase.  This figure is less than the 14.5% GDP rise recorded in 2011, and the cedi, Ghana’s national currency, has weakened considerably over the period, raising concerns among many.

The World Bank classifies the Republic of Ghana as a “Lower–Middle Income Economy”, although within Africa, it ranks number three behind South Africa and Nigeria.

From a global perspective, it is an “emerging” economy that is in a favorable development phase.  Growth, however, does not come without its share of challenges, one being the weakening nature of its national currency, the “cedi” (ISO code “GHS”; Local symbol “GH¢”).  The cedi has weakened noticeably versus the US dollar over the past year, as depicted in the following chart:

 

Currency exchange rates are often referred to as the “fulcrum” between a nation’s domestic economic activities and how the global investment community compares it on a relative basis to other countries’ economies.  There are many fundamental drivers for this evaluation process, but it is not uncommon for a small country’s foreign exchange rate to gyrate widely and depreciate, even when the local economy is growing faster than most other countries.  As a matter of fact, the cedi has actually been one of the worst performing currencies versus the Greenback, but this positioning is not necessarily bad.

In today’s era of globalization, markets are more interconnected than ever before, and capital can flow across national borders, both in and out, in an instant, based on the prevailing risk profile of the global economy, which may be the opposite of what is experienced on a local level.  Ghana is truly in “growth mode”, but like any small business struggling to get to the next level, it has working capital needs that must be financed in order to capitalize on improving prospects for the future.

The economy of Ghana is heavily dependent on exports in oil, commodities, and agriculture, all of which need important investments in equipment and infrastructure that must come from outside the country.

Imports are on the rise.  Inflation has been hovering for two years in the 8.5% to 9.2% range, necessitating a recent increase in interest rates by the central bank to 14.5% to help curb local price increases.  Government borrowings are planned to meet any capital gaps, while foreign exchange reserves are maintained at a $5.4 billion level, enough to finance over three months of imports.

Will conditions improve for the cedi going forward?  Jacob Brobbey, a currency trader at the Ghanaian unit of Barclays Bank Plc, believes better times are ahead when he recently noted that, “We are seeing strong dollar demand from the commerce and manufacturing industry, most I believe are built up from last year.  With time we hope to see mining companies and non-governmental organizations sell dollars on the market.”

Currency values, however, are a “relative” matter.  Economic crises have occurred in both Japan and Europe over the past year, causing a massive repatriation of capital from foreign investments to occur, putting extreme pressure on the cedi and many other emerging market currencies, as well.  A weaker currency, however, will increase demand for Ghana’s exports and attract foreign investment, both crucial requirements for future growth.  Perhaps, Europe should follow Ghana’s lead and weaken the euro to improve its growth prospects going forward.

Written by Tom Cleveland of Forex Traders , exclusively for ghanabusinessnews.com