JP Morgan, a leading global investment bank and provider of financial services, has issued a warning that Ghana's proposed debt restructuring initiative may worsen the position of the local currency.

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The US-based company claims that the trend may be significant even if Ghana's central bank temporarily tightens or loosens its foreign exchange (FX) purchasing strategy in order to support the cedi.

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In a recent Emerging Market Quick Take article on the Ghana Cedi's performance, JP Morgan ascribed the loss to the Bank of Ghana's decision to buy dollars from mining and oil businesses, which unintentionally decreased the amount of foreign exchange available in the inter-bank market.

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The global investment bank further attributed the loss of confidence in the domestic economy, which it believes has drained FX reserves and resulted in volatility.

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“The cedi has now weakened by around 60% against the US dollar this year, as uncertainties about the need for, and extent of, debt restructuring increased. The drain of FX reserves year-to-date means the Bank of Ghana (BoG) now has limited firepower to smooth FX volatility.”

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It continued, “However, we believe the main trigger for the move to 14.875 (mid) in spot over recent days can be traced to BoG’s decision to purchase dollars from mining and oil companies, inadvertently reducing FX availability within the inter-bank market.”

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JP Morgan added that, “Although the current account deficit (CAD) is only moderately wider, the loss of confidence domestically has resulted in a significant drain from the financial account, even though portfolio outflows have been relatively limited.”

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“Based on our risk-reward scorecard, Ghana now looks attractive, but we expect concerns about the scope of debt restructuring to continue dominating, potentially leading to even more GHS weakness, even if an increase in FX forward auction sizes or reversal of the FX purchase policy results in short-term respite for the cedi”, it explained.

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Further touching on the Bank of Ghana’s decision to purchase dollars from mining firms, JP Morgan said the move has rather resulted in a squeeze and increased pressure in the FX market.

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At the present, the BoG has not increased the size of the fortnightly FX forward auctions and continues to issue at $25 million although demand has reached $100 million per auction.

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“To reduce volatility, we believe the BoG may need to use proceeds from mining sector FX purchases to increase interventions, or alternatively, reverse the FX purchase policy. Since the policy was implemented, the central bank reports that it had purchased around $84 million as at end-September [2022] and expects to have purchased $500 million by year-end,” JP Morgan advised.

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