…. As govt prepares to sell US$1.5 Billion ahead of Election

The government, in the next couple of weeks, plans to sell US$1.5 billion in foreign currency to keep the cedi from resuming this year’s slide to record lows against the major trading currencies like the dollar as the country heads into elections in December.

“We don’t want the cedi to fall too low, and we don’t want it to rise too high,” Adams Nyinaku, head of treasury at the Bank of Ghana, said in an interview in Accra. “If the currency weakens too much it affects importers and if it becomes too strong it does not encourage exporters.”

The currency of West Africa’s second-biggest economy fell to a record of 1.9575 a dollar on Aug 7. as demand for foreign exchange to meet economic growth-driven import needs soared. The country’s economy, which grew 14.4 percent last year following the start of oil exports, is forecast to expand 9.4 percent this year, according to the Finance Ministry.
To stem the cedi’s drop, the central bank increased its key interest rate this year by 2.5 percentage points to 15 percent, offered new shorter-duration Treasury bills to mop up excess liquidity and asked banks to increase cedi reserves kept with it. The cedi has gained 1.2 percent this month and weakened 0.2% to 1.9105 a dollar.

Ghana’s central bank sells dollars to the market on demand from companies that import goods including fuel. That contrasts with other African central banks such as Nigeria and Angola where regular auctions of dollars are held.

Oil Imports

So far this year, the central bank has sold $3.4 billion, including $1.9 billion for oil imports, Nyinaku said. Of the $1.5 billion to be sold before the end of the year, $1 billion will be used for imports of fuel and $500 million for non-oil importers, he said.

Spending by political parties before the elections may see companies’s cedi coffers rise and increase the amount of local currency in circulation, according to Yaw Adu-Koranteng, a research analyst at Accra-based Gold Coast Securities Ltd. That could weaken the currency 1.5 percent from its Sept. 17 closing of 1.8955, he said in an interview.

President John Dramani Mahama will seek to win his first term in office and a second parliamentary majority for the ruling National Democratic Congress party in the December polls.
Mahama, who replaced President John Atta Mills following his death in July, faces Nana Akufo-Addo of the main opposition New Patriotic Party.

Reserves Decline

The dollar auctions should be enough to ease pressure on the cedi from election spending, according to Nyinaku. “I believe some of the political parties may even contribute to dollar inflows through financial support from members abroad.”

The West African nation’s gross international reserves, from which it sells the U.S currency, declined to $4 billion in July from $4.1 billion in June, the central bank said in a report yesterday.

The reserves will rise when the bank exchanges the Ghana Cocoa Board’s US$1.5 billion trade-finance loan for cedis in the first week of October, Nyinaku said. The board that regulates the cocoa industry signed the loan with banks on Sept. 12 for the purchase of cocoa beans in the 2012-13 crop season. The board in turn lends the money to licensed buying companies that purchase the beans from farmers.

Business confidence declines

The Business Confidence Index, computed from the latest Bank of Ghana surveys, show a decline from 96.4 in March 2012 to 95.1 in June 2012, driven by softened business sentiments on the exchange rate, sales prospects, profit levels, as well as higher inflation expectations.

Similarly, the Consumer Confidence Index declined from 99.5 in May 2012 to 98.4 in July 2012 driven by the lower macro confidence sub index; however the consumer welfare sub-index increased.

According to the Central Bank’s Composite Index of Economic Activity (CIEA) showed an annual growth of 7.7 per cent in June 2012, compared to 20.1 per cent in the same period of 2011. The components which contributed to the growth in the CIEA were industrial electricity consumption, credit to the private sector and imports.
Headline inflation remained unchanged at 9.5 per cent in August, as it was in July 2012. Food inflation fell from 5.5 per cent in July to 4.4 per cent in August 2012, while the non-food inflation component went up from 12.0 per cent in July to 12.5 per cent in August 2012.


Banks tighten credit stance for enterprises
The Credit Conditions survey conducted by the Bank of Ghana in July 2012 revealed tightened credit stance for enterprises and households’ credit for mortgages. The tightening of credit stance was more pronounced for small and medium sized enterprises on account of inadequate cash flows to support repayment, weak financial performance and inadequate security, according to the survey.

However, the credit stance on households’ consumer credit continued to ease.
According to the Central Bank, the Private sector credit continued to show strong growth in the first half year. Nominal credit grew by 41.3 per cent on a year-on-year basis to GH¢10.4 billion in July 2012, compared to 25 per cent a year ago. In real terms, credit to the private sector recorded a 29 per cent annual growth in comparison to 15.4 per cent in July 2011.
The banking industry’s total assets was GH¢24.3 billion in July 2012 compared with GH¢19.5 billion in July 2011, and was largely funded by 5 bank deposits. Over the one year period to July 2012, total deposits increased to GH¢17.6 billion from GH¢13.8 billion.
The quality of the banking industry’s loan portfolio improved in the period under review. Non-performing loans ratio declined to 13.4 per cent in July 2012 from 16.4 per cent in July 2011. The DMB’s solvency as measured by the Capital Adequacy Ratio continued to be strong and was above the statutory minimum of 10 per cent, although it declined to 15.5 per cent in July 2012 from 17 per cent in July 2011.
Growth in broad money supply slowed down significantly from 42.6 per cent in July 2011 to 27.7 per cent in July 2012. The main source of change was from Net Domestic Assets (NDA) of the banking system.

Investors shift to long dated instruments

Investors in the country have shifted their investment portfolio to long dated instruments as interest rates continued to trend upwards in the money market.
Between December 2011 and August 2012, the rates on 91-day treasury bills rose to 22.7 per cent from 10.7 per cent, while 182-day bills rates moved to 22.9 per cent from 11.3 per cent.

1-year fixed notes reached 22.5 per cent from 11.3 per cent. Similarly, 2-year fixed notes increased to 23 per cent from 12.4 per cent. 3-year fixed notes increased to 24 per cent from 14 per cent, while 5-year bonds went up to 23 per cent from 14.3 per cent.

The interbank weighted average rate increased to 16.8 per cent in August 2012 from 6.6 per cent in December 2011.

The average 3-month deposit rate increased to 10 per cent in July 2012, from 7.8 per cent in December 2011, while average lending rates declined to 24.7 per cent from 25.9 per cent in the same period. On a year to date basis, therefore, the lending deposit spread narrowed to 14.7 per cent in July 2012, compared to 18.2 per cent in December 2011.

Base rate quotations for banks ranged between 12.7 per cent and 26 per cent in July 2012. On the average, bank’s base rates fell to 20.5 per cent in July from 25.9 per cent in May 2012, despite the monetary policy rate hikes and increasing trend of rates on money market instruments.