Cedi’s appreciation no more than a bubble

BEWARE the world’s best-performing currency.

The Ghanaian cedi’s 30 percent surge this month is based on misplaced optimism about the economy, according to both Morgan Stanley and Rand Merchant Bank, a unit of Africa’s biggest lender. The median of five analyst forecasts compiled by Bloomberg suggests it will slide all the way back to a record low by the middle of next year, posting the biggest drop of any currency after Venezuela’s bolivar on its way.

The cedi’s fortunes hinge on the West African nation’s ability to meet the terms of a bailout loan it took as demand for its oil and cocoa exports collapsed. When the International Monetary Fund (IMF) said last month that Ghana was sticking to the conditions of the rescue, the currency started climbing. Now, the government’s own deficit figures suggest the Washington-based organisation was too hasty in its assessment.

“I don’t think this rapid appreciation will be sustained,” said John Ashbourne, an Africa economist at London-based advisory firm Capital Economics, which forecasts a 20 percent decline in the cedi by year end.

The cedi reached a record low of 4.49 (R16.33) to the dollar on June 29. A day later, it started appreciating after the IMF said Ghana was on track to beat its targets for cutting the budget deficit, closing at 3.295 on Thursday in Accra. It had weakened 2.9 percent to 3.395 by 7.10am on Friday.

The currency’s prospects soured on Tuesday, when Ghana’s finance minister raised his outlook for the 2015 budget shortfall to 7.3 percent of gross domestic product, from an initial estimate of 6.5 percent. The cedi has already dropped 3.6 percent from a five-month high reached earlier this week.

“The much-touted fiscal progress that earned a glowing report from the IMF last month and triggered the strong rally in the cedi was purely based on data for the first four months of the fiscal year,” Michael Kafe, an economist at Morgan Stanley in London, said in a July 20 report. “We acknowledge the progress but believe that it’s too early to declare victory.” – Bloomberg