SAPPI Economic Research Institute

COVID-19 IN GHANA: THE CALIBRATION AND THE ATTRIBUTION (Simplified view)
By: Wisdom Dewortor
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1. CoViD-19 made official entry and gained official attention in Ghana by March 2020.

2. It was not only a major health issue, it has consequences for livelihoods. Health facilities and personnel were not spared of its immediate punches.

3. Economies around the world instituted measures, with focus on preserving jobs, livelihoods. However, the attendant effects are expected on economies with acute strike expected on developing economies.

4. The call for financing support to manage the impact was made. Individuals, firms including multilaterals and governments supported. The idea is to determine the extent of impact and use financing to mitigate the negative havoc it may cause or have caused. Calibration was done to identify financing needs. This was also done for Ghana.

5. However, expenditure analysis from the Ministry of Finance points to the fact that expenditure is short of the streams of inflow of resources earmarked for CoViD related expenditure. (billions of cedis)

6. Moreso, government since May 2021, has instituted CoViD-19 Health recovery levy (1%).

7. With less expenditure than earmarked funds for CoViD and the ongoing CoViD levy. Is it safe to say government benefited from CoViD than other micro agents (individuals and firms?

8. In what way has CoViD been the cause of our woes? The intermediation were ineffective or wrongly calibrated?

9. What happened to large fiscal deficits in 2018 and 2019? A pre-CoViD era under an IMF program yet with such slippages?

10. CoViD really displaced our fiscal balances that the consequences have literally eaten deep into our fundamentals?

GHANAIAN CEDI ON THE RUN: WHAT’S THE RIGHT MARKET SIGNAL? (Part 3/3)

By: Wisdom Dewortor

NEW BLOWS – FURTHER DOWNGRADES

One would have expected the presentation of the Mid-Year Budget Review to inject some hope and place the cedi in a stable zone. However, the cedi further lost about 3 percent more in value. This would be interpreted as an uninspiring, or the Budget Review lacks the strength to spur a stable domestic currency. Moreover, the aftermath of the visit by the IMF left many blows on the domestic currency. As the free-fall of the cedi continues, the situation got exacerbated by the downgrade by S&P on the country’s foreign and local currency sovereign ratings to junk from B-/B to CCC+/C with negative outlook . This was followed by another downgrade by Fitch Ratings from B- to CCC. Generally, the agencies concluded that the downgrade reflects the deterioration of Ghana’s public finances as well as reflecting Ghana’s limited commercial financing options, and constrained external and fiscal buffers. This caused further 17 percent loss of value for the domestic currency, the highest over the shortest window.

Hurriedly, the monetary policy committee of the Bank of Ghana convened an emergency meeting on August 17, 2022. On the day of the said meeting, the cedi lost additional 1 percent in value, with 3.3 percent more the following day, and later averaged 1.26 percent per day till August 23, 2022 (final date applied in the analysis). Thus, instead of the announcement of and the subsequent convening of the said meeting to spur the cedi to stability, the reaction of the market proved otherwise. The conclusion drawn is the fact that efforts and strategies of the Central Bank as drawn from the Emergency MPC meeting carry no effect in stabilizing the cedi. Either the market has lost faith in the policymakers or the potency of the interventions is unmatched to the vulnerability of the cedi or the general outlook of the economy.

LESSONS AND CONCLUSION

Having drawn the reaction of the cedi to these major events, it is evident that domestic policies and strategies are either partly impotent, counterproductive or initiated with time lags. Moreso, the effects of downgrade by the rating agencies mounted much pressure on the domestic currency, persistent for weeks, a phenomenon that should not be left unattended. It is also obvious that the passage and the implementation of the e-Levy is associated with stability of the domestic currency. Besides, the announcement of the President on engagement with the IMF also gave the cedi stability and breather for some days. The available lessons include strategizing domestic communications, especially from the Ministry of Finance and the Bank of Ghana, that could inspire hope in the domestic economy and signal positive sentiments to the investor community. It is also recommended that policy initiatives and actions are to be more proactively executed than to be reactionary.

GHANAIAN CEDI ON THE RUN: WHAT’S THE RIGHT MARKET SIGNAL? (Part 2/3)

By: Wisdom Dewortor

THE RATING GALORE BEGINS (FITCH AND MOODY’S)

Rating agencies are independent bodies that examine how creditworthy a borrower is, and that forms the basis for which investors could rely to assess the credit quality and assign the appropriate risk premium if they are to lend. The assigned credit grades are letters from ‘AAA, AA+, B, C, D’. The grades are categorized as investment-grade (AAA to BBB+) and speculative-grade or “junk” (BBB- or lower). Notable credit rating agencies include the Fitch, Moody’s and Standard and Poor’s (S&P). Through fiscal imbalances, the structural balance of the economy deteriorates with attendant consequences of rising unsustainable debts, it therefore becomes clear that the ability of the economy to honour its debts become more doubtful. This phenomenon induces deterioration to the grade assigned to an economy. The fresh of its kind in 2022 relates to the downgrade of Ghana's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B-' from 'B' with a negative outlook by Fitch on January 14, 2022. The immediate effect saw the cedi down against the dollar by 3.32 percent. The justification, Fitch assumes that Ghana will be unable to issue on international capital markets in 2022 and prospects for doing so in 2023 are uncertain. Later, Moody’s downgraded Ghana to ‘Caa1’ with a stable outlook on February 4, 2022. These multiple downgrades within a three-week window mounted additional pressure on the Ghanaian cedi. Moody’s further assert that the downgrade reflects the increasingly difficult task the government faces in addressing its intertwined liquidity and debt challenges. These, cumulatively mounted more pressure on the Ghanaian cedi to an about 11 percent loss in value for the month of February. Thus, reported by Goldstreet Business , the Ghana cedi has been classified as the worst of African currencies with the “Worst Spot Returns” by the Bloomberg. The conclusion here is, external credit ratings mounted more pressure on the cedi, and a quick response from the policymakers would be required to stabilize the situation.

THE CONTROVERSIAL E-LEVY AND STABILITY (MARCH 29 TO MAY 13, 2022)

The performance of the Ghanaian cedi looked downward throughout March till the uncertainty behind the passage of the controversial electronic levy (e-Levy) was passed on March 29, 2022 at an applicable rate of 1.5 percent on affected transactions. It must be noted that from the passage of the bill, the cedi has enjoyed stability and an eleven-day continuous gain against the dollar (cumulatively 1 percent). The cedi thereafter till May 1, the implementation date of the e-Levy continued its impressive stable performance (moderately stable) relative to prior periods. Obviously, this period could be described as the most stable period for the domestic currency till May 13. Hence, the passage and the implementation of the e-Levy is associated with a more stable domestic currency as witnessed. This could be interpreted as sending a major market signal to the investor community on an assured source of revenue basket to the government.

THE UNIMPRESSIVE VACUUM (MAY 16 TO JULY 1, 2022)

Since the stable “vacation” enjoyed by the Ghanaian cedi, there seems to have left a huge vacuum for policy action to reinforce the domestic currency. When this reinforcement became unavailable, the loss in the value of the cedi became heavy and continuous. Cumulatively, the cedi has lost about 6 percent in value over the period (1 percent per week on average). These were periods where many doubted the macroeconomic stability, the e-Levy being close to target, debts sustainability, cost of living and whether International Monetary Fund (IMF) could be called in for a “bailout”. Finally, on July 1, 2022, the President of Ghana had instructed the Minister responsible for Finance to engage the IMF. Some might argue that the vacuum was to allow to assess the performance of the e-Levy as an alternative to constituting an IMF arrangement. Irrespective, we are of the opinion that the call to engage the IMF was late and could have taken place earlier. Thus, the vacuum was avoidable. Why? The announcement by the President saw the cedi creditably gained 1 percent value over the subsequent seven days (July 8, 2022). Besides, the IMF staff that visited Ghana, made assessment of the economic situation and concluded as follows; “Ghana is facing a challenging economic and social situation amid an increasingly difficult global environment. The fiscal and debt situation has severely worsened following the COVID-19 pandemic. At the same time, investors’ concerns have triggered credit rating downgrades, capital outflows, loss of external market access, and rising domestic borrowing costs”.

To be continued…

GHANAIAN CEDI ON THE RUN: WHAT’S THE RIGHT MARKET SIGNAL? (Part 1/3)

By: Wisdom Dewortor

INTRODUCTION

Many might be familiar with this assertion, “in an open economy with market determination of prices, exchange rate movements are the most important indicator of underlying macroeconomic fundamentals” as made by Bawumia (2014). Notwithstanding, exchange rates movements must also be contextualized to identify whether they are reacting to major market events or defining underlying issues germane to an economy.
We exploited the former signal, to assess the reaction of the Ghanaian cedi to major market events. The purpose is to ascertain the reactionary effectiveness of the Cedi, and correlate if domestic actions of policymakers could also provide any stabilizing effect relative to cases of currency instability. To help achieve this purpose, we analysed the exchange rate movements of the Ghanaian cedi to the U.S. dollar for the period, November 3, 2021 to August 23, 2022. The daily exchange rates are extracted from Refinitiv and exchange-rates.org platforms . The choice of November 3 as the start point, is to allow for two weeks lag to the date of the presentation of the 2022 Budget Statement . We therefore used November 17 as the base period (index = 100). The justifications are; the Budget statement is a policy document intended to outline government’s commitment to ensuring macroeconomic stability and stir up “hope” (at least, a recovery from COVID-19 and its consequences). The budget statement presentation is also seen as a major government event intended to answer speculative views on the performance of the economy, now and in the medium term. An increase in the index for a given period relates to the loss of value in the Ghanaian cedi, relative to the value on the day the budget statement was delivered (November 17, 2021).

BASE PERIOD AND STABILITY (NOVEMBER 3, 2021 TO JANUARY 12, 2022)

The performance of the Ghanaian cedi prior to the laying of the Budget Statement in Parliament and when it was eventually laid has not made any significant changes. In particular, the index stabilized over this period. If the market had reacted ambitiously to the budget, at least a 1 percent decrease in index would have prevailed. However, that was not the case. One would have argued, that the budget has rather stabilized the cedi, leading to no change. Then, this would be inconsistent with the prior budget dates (two weeks lag) which approximated to the base index of 100. Second, the budget was approved by Parliament on December 1, 2021. This would equally have made the pricing of the domestic currency stronger at least (lower index relative to the base or prior period), as a signal of inspiring hope and effectiveness. The conclusion therefore, the budget might not possess the strength to ignite market reaction that would translate to gains for the domestic currency.

GHANAIAN CEDIS ON THE RUN: WHAT'S THE RIGHT MARKET SIGNAL?

By: Wisdom Dewortor

Summary notes
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1. Many might be familiar with this assertion, “in an open economy with market determination of prices, exchange rate movements are the most important indicator of underlying macroeconomic fundamentals” as made by Bawumia (2014).

2. Notwithstanding, exchange rates movements must also be contextualized to identify whether they are reacting to major market events or defining underlying issues germane to an economy.

3. We exploited the former signal, to assess the reaction of the Ghanaian cedi to major market events. The purpose is to ascertain the reactionary effectiveness of the Cedi, and correlate if domestic actions of policymakers could also provide any stabilizing effect relative to cases of currency instability.

4. The daily exchange rates are extracted from Refinitiv and exchange-rates.org platforms for the period November 3, 2021 to August 23, 2022. We therefore used November 17 as the base period (index = 100).

5. The presentation and the subsequent approval of the 2022 Budget Statement had no signalling effect. Thus, the budget might not possess the strength to ignite market reaction that would translate to gains for the domestic currency.

6. The conclusion here is, external credit ratings mounted more pressure on the cedi, and a quick response from the policymakers would be required to stabilize the situation.

7. The passage and the implementation of the e-Levy is associated with a more stable domestic currency as witnessed. This could be interpreted as sending a major market signal to the investor community on an assured source of revenue basket to the government.

8. The call to engage the IMF was late and could have taken place earlier.

9. Efforts and strategies of the Central Bank as drawn from the Emergency MPC meeting carry no effect in stabilizing the cedi. Either the market has lost faith in the policymakers or the potency of the interventions is unmatched to the vulnerability of the cedi or the general outlook of the economy.

10. Policy makers must be proactive and communications must ignite positive consumer and investor confidence.