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Crude oil, dollar stresses economy

ken-oforiTHREE planned hikes in the United States of America (USA) interest rate this year and forecasts of rising crude oil prices are bound to have far-reaching consequences on Ghana’s economy.

Promises by the President Nana Akufo-Addo-led administration to turn round the fortunes of economy face an uphill task if these two external factors that are beyond Ghana’s control, continue to rise.

The cedi continues to depreciate primarily because of inadequate dollars to finance imports as well as the hike in US interest rate last year which has strengthened the dollar.

High cost of imports in Cedis

The depreciation of the Cedi has led to a rise in the prices of imported products, especially prices of petroleum products which is biting hard.

The Cedi is linked to the dollar and this is likely to put pressure on the Cedi to depreciate further.

As an import-dependent country that needs dollars mostly to finance imports, a decline in dollar supply would only worsen the plight of the Cedi.

Cedi now at GH₵4.50

The Cedi has been on the ropes this year as $1 now sells at GH₵4.50 at most forex bureaus.

GH₵20 per gallon of petrol

Cedi depreciation has hiked prices of petroleum products taking a heavy toll of consumers.

For example, petrol price increased from GH₵4.140 to GH₵4.320 per litre translating into GH₵20 per gallon of petrol.

Worst than expected budget deficit

Also, the Cedi has been under pressure after the new government announced it had uncovered contract arrears of $1.6 billion and a budget deficit close to double digits, compared to the 2016 target of 5.25 percent of Gross Domestic Product (GDP).

Risk-averse investors are edgy

Risk-averse investors are edgy, leading to a surge in offshore dollar demand amid a seasonal liquidity crunch as local businesses settle their first quarter import bills.

High dollar demand by importers

Officials have attributed the Cedi’s persistent decline to a seasonal high dollar demand by bulk oil distributors and other heavy importers to settle maturing bills.

Uncertainty weaker-than-expected fiscal deficit

Uncertainty over how the new government will address the country’s weaker-than-expected fiscal deficit for 2016 is also put the local currency on the ropes.

OPEC and oil prices

Oil prices ended modestly higher on Thursday, as the market weighed swelling U.S. inventories against possible renewed efforts by major oil producers to reduce a price-sapping glut.

Crude futures were initially bolstered after sources said the Organization of the Petroleum Exporting Countries (OPEC) may consider extending its oil supply-reduction pact with non-members and might even apply deeper cuts if global crude inventories failed to drop to a targeted level.

Oil swayed between modest gains and losses throughout the session before rebounding late, and U.S. crude futures CLc1 settled at $53.36 a barrel, up 25 cents. Brent crude LCOc1 ended the day at $55.65 a barrel.

Prices have traded in a tight $55-range since OPEC and other exporters including Russia agreed last year to cut output by 1.8 million barrels per day (bpd) to reduce a price-sapping glut. The deal took effect on Jan. 1 and lasts six months.

Impact of US economy

Given that  the  US  economy  is  already  at  full  employment,  any  further  push  up  of  the growth rate may put upward pressure on inflation, interest rates and the  dollar.

Planned US interest rates hikes

It  is  expected  that  the rate setting Federal Open Market Committee (FOMC) may  hike  interest  rates  twice  or thrice  during  the  course  of  2017.

Sudden stops and reversals of portfolio flows

This  could  lead  to sudden  stops  and  reversals  of  portfolio  flows from  emerging  market  countries  and  cause  depreciation   of   currencies in   emerging   market   economies.

Impact of Brexit

Other challenges  that  the  global  economy  may  face  include  uncertainties  emanating  from  the  political  fallout  from  Brexit  and the  presidency  of Donald  Trump  in  the  United  States with  its  attendant  geopolitical  tensions across the globe.

Macroeconomic policies of Ghana

But  the  question  is whether given  the  current  state  of  the  economy,  external  sector projections  and  probable  domestic  macroeconomic  policies, it will  still be  possible  to achieve all  three  goals: appreciable  disinflation, stable exchange rate and a reduction in interest rates in the short term.

Achieving these three at the same time may be a challenge, especially when the external environment and domestic macroeconomic policies are not consistent.

Calls to Hedge crude oil prices

The Institute of Fiscal Studies (IFS) has made fresh calls for Ghana to hedge its oil to protect the country from shocks in the global price of crude.

The IFS believes a decision to lock up the price of the nation’s share of crude oil outputs from the Jubilee Field and the TEN Project will ensure that revenue projections from petroleum are not unduly hampered by a global fall in prices of the commodity.

The call also follows recommendations by the Public Interest and Accountability Committee (PIAC) for Ghana to hedge its oil resources.

In its half year 2016 report, PIAC said, “Average achieved price for the Jubilee Crude oil was US$40.21 per barrel compared to benchmark price of US$53.03, representing a negative variance of 24.21%.”

Though Ghana accrued about $90 million from hedging between 2010 and 2012, subsequent decision to halt the policy has adversely affected revenue from the oil sector following the plunge in the price of the commodity.

Impact on emerging market

Emerging market companies are being asked to pay more to service debts while sources of finance are dwindling.

Reinforcing these effects is evidence that the surge of capital that flowed into emerging markets over the past decade has started to reverse.

If the Federal Reserve’s tightening trajectory is sustained in 2016 — and its own forecast suggests that it should be — the impact on emerging market would be terrible.

One of these is the unwinding of a huge emerging market borrowing boom that was fuelled by US-inspired easy money.

Equity investors welcomed the move, sending stock prices higher in the US, Europe and Asia.

Even emerging markets, many of which have feared the fallout from a US rise, generally took the widely expected move in their stride.

Impact on dollar bonds

Ghana and African countries that have borrowed heavily in dollars may be slipping back into the debt trap – and ultimately default – only a decade after a far-reaching round of debt forgiveness.

Some are looking to issue more Eurobonds to refinance existing foreign currency loans, but with US interest rate hike, the inevitably higher borrowing costs will do little to alleviate pressure on creaking state budgets.

When Ghana launched its debut bond in 2007 with an 8.5% interest rate, the cedi was virtually at parity with the dollar.

It is now around 4.5, meaning Ghana is in effect servicing a loan equivalent to over $3 billion for the first $750m debt.

Ghana has agreed a $948 million, three-year rescue package with the International Monetary Fund in April, but even if the programme works, IMF admits the government’s interest payments are likely to stabilise at an eye-watering 40% of revenues before the US interest rate hike.

And in reality, the IMF package – essentially a dollar loan with slightly more favourable interest rates – is merely papering over the cracks.

The cost of refinancing through more global bond issuance is also rising, as shown by the hefty 10.57% interest rate Ghana had to pay when it sold a $1 billion Eurobond.

Foreign trade statistics

So far, only about 18.5% of gold and oil exports revenues go into the government chest; the rest belongs to multinational companies that have invested in the sector, and as result not all the money come back to Ghana’s economy.

If the planned rate hikes are carried out, borrowing from the international market would be costly as foreign investors would demand higher interest rates.

The planned US rate hike could compound Ghana’s already bad economic problems as crude oil prices are projected to rise fall further in 2017.

Incentive to dollar suppliers

The Bank of Ghana would be expected to offer incentives to institutions and individuals who could bring in large quantities of dollars by offering them attractive interests above the market price of the dollar.

This could bring in the needed dollars to stabiles the cedi in the face of tightening US policy rates.

With the US rate hike, it is much safer to invest in the US than in emerging markets such as Ghana, where indicators point to possible default.

As a result, the dollar inflows from investment cash would drop significantly, creating a shortfall of dollars in Ghana.

 

Source: http://www.thefinderonline.com/News/Crude-oil-dollar-stresses-economy.html

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