Dr Ernest Addison, BoG Governor
The results of the first of the 24 forward foreign exchange auctions scheduled by the Bank of Ghana for 2021 indicate that the local forex market remains confident that the cedi will hold its own against the United States dollar at least through to the end of the first quarter of the year. Altogether there were 136 bids for various volumes of dollars with delivery from the central bank expected over 7,15,30,45,60 and 75 days respectively. The highest bids came for delivery in 30 days time, at a range of GHc5.8050 – 5.9000 and the BoG prudently rejected bids for this tenor of over GHc5.8600. However the single bid for delivery of US$500,000 in 75 days time – the end of March – was placed at GHc5.7850
Considering that the dollar currently sells on the interbank market for about GHc5.7832, the range of bids for delivery of dollars through the first quarter of this year suggests that forex users and their bankers do not expect any significant depreciation over the coming two and a half months at least.
Altogether the BoG put up US$50 million for sale out of the US$775 million it intends to sell in 2021 through forward auctions. Unsurprisingly total bids were 2.76 times the amount offered, with most of the bids placed requesting for the shortest delivery times on offer, which warns that although the markets are fairly confident of future supply, they want the forex they will need in their coffers as soon as possible.
There were 51 bids for delivery in seven days amounting to US$63.25 million of which US$22.5 million was granted at rates ranging between GHc5.8200 and GHc5.8325 This was closely followed by the 50 bids for 15 days delivery of a total of US$49.5 million of which US$15.75 million was actually sold at rates of between GHc5.8330 and GHc5.8550.
Curiously the highest bid came for 30 days delivery, with at least one bid reaching GHc5.9000 although was most likely an aberration rather than part of a trend as it was not repeated for any other tenor, even the longest on offer. Importantly the BoG used this opportunity to send a warning to the market that inordinately high bids will not be countenanced; it only accepted nine of the 22 bids made for this tenor ranging between GHc5.8260 and GHc5.8600, selling US$6.75 million out of the US$17 million demanded.
There were nine bids for delivery in 45 days of which five were accepted, selling US$3 million at a range between GHc5.8064 and GHc5.8350. For delivery in 60 days, all three bids made, cumulatively demanding US$1.5 million were accepted at a price range of between GHc5.7825 and GHc5.8000.
Indeed, both the number of bids and total amount requested declined in inverse correlation to the delivery tenor culminating in just one bid for 75 days delivery of US$500,000 which was also accepted fully.
This implies that government has passed a litmus test; in recent years, in particular, the most intense pressure on the exchange rate has tended to come during the first quarter and indeed in 2019 the cedi was the worst-performing currency worldwide of 149 tracked by Bloomberg during the first quarter before recovering subsequently. This is in part why the government is seeking to do a Eurobond issuance of possibly as much as US$5 billion as early as possible this year.
However since the BoG astutely introduced forward forex sales in late 2019 to improve price discovery, the resultant bids have neutralized the efforts of currency speculators who tended to take positions against the cedi for short term profit. Now macro-economic fundamentals primarily determine the cedi’s exchange rate and with Ghana running a trade surplus consistently since the last quarter of 2016, and gross international reserves having been built up to a long term high of over US$8 billion since 2019, those fundamentals are better than ever.
Altogether the BoG has allocated US$775 million for sale this year through its forward forex auctions, which were introduced in September 2019 and have since been outstandingly successful in stabilizing the exchange rate.
As it did last year the BoG is front-loading its sales in order to build up confidence among forex traders and users right from the beginning of the year and thus stem speculative – and consequently inordinate – demand for forex through the year.
In line with this tried and tested strategy the central bank will offer US$50 million during each of the two auctions per month in January, February and March respectively, and then US$25 million at each of two auctions in April and May respectively. It will then offer US$25 million per auction at each of three auctions in June, two in July, August, September and October respectively, three in November and one in December.
The results of the first forward forex auction for the year put paid to Trading Economics forecast of gradual but marginal depreciation of the national currency. It had projected that the exchange rate will rise to GHc5.92 by the end of the first quarter of this year, GHc6.03 by mid-year, GHc6.14 by the end of the third quarter and GHc6.25 by the end of 2021 as a whole. However, last week’s auction results suggest that the exchange rate may not exceed GHc5.85 to the dollar by the end of the first quarter unless a supply crisis emerges on the spot forex market. But this is highly unlikely what with Ghana’s sturdy gross international reserves and expected multi-billion-dollar inflows from the impending Eurobond issuance.
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