PYRRHIC DANCE AT THE GATES OF HADES: THE SENSE, AND NONSENSE, OF THE GHc vrs US$ TANGO
THIS ARTICLE WAS ORIGINALLY PUBLISHED ON FACEBOOK ON 14TH JULY 2015
President John Mahama, his ‘men’, and the hordes of their fans wildly delirious over the bullish run of the Ghana Cedi (GHc) in the last few days, particularly against the United States Dollar (US$), have not learnt anything, nor heard anything some of us have said in the past.
Time and again, the slightest upward blip in the value of the GHc has been met with wild celebration by the Government, and this particular group of fans, with street parties, beating of chests, and popping of champagne, while some of us soberly caution restraint. They are at it again, and I’m very, very sad. And this is why.
Ps: As I have said previously, I’m taking a break from trying to make sense to policy makers. I’ll stick to my ‘streetnomics’ for now.
A. THE SENSE
Save a few, who stand to gain because they are, quite rightly, sitting on the othe side of the Deal Table, not many an ‘ordinary’ Ghanaian is happy when the GHc continues it downward spiral.
On 1st January 2015, the GHc was 3.2024 to the US$. On June 30th, 2015 it was 4.4333 to the US$, a HALF-YEAR depreciation of 38.44%.
On 1st January 2014, the GHc was 2.3650 to the US$. In other words, the YEAR-ON-YEAR depreciation of the GHc (2014 to 2015) was approximately 35.41%.
What this means is that the GHc is depreciating TWICE AS FAST this year (Full Year 35%, Half Year already 38%).
That should give anyone managing the economy, and/or supporting the managers of the economy, reason to take a deep breath, and a pause, before getting all worked up over last week’s performance of the GHc. If, as it appears, just by means of the wave of a wand, the GHc can appreciate as precipitously as is being celebrated, why hasn’t it been so over the last few years?
Now let us look at the cause of the jubilation. After an initial reluctant appreciation between 1st July (4.3778 to the US$) and July 5th (4.3475), it rapidly went to 3.6360 by July 11. That’s a 16.37% appreciation in 6 days!!! (or 2.73% for each of those days). Commonsense should immediately tell you that this doesn’t add up, especially absence any dramatic market signalling and/or shift in the structural causes of the long term depreciation of the GHc. It was the same discussion we had before the first tranche of the IMF support funds came in. And true to the nature of the market, the value of the GHc tanked after the excitement was over.
This has happened before. On September 1st 2014, the GHc was 3.8008 to the US$. By November 6th of same year it was 3.2029 to the US$, an appreciation of 15.73%. It doesn’t last because the fundamentals have not shifted. At best, these blips happens based on transient factors, or some OMO by BoG.
It will take a naive propagandist, or a foolhardy economist, to hold this up as a sign of a long term bullish run when, against the data, and absence of any fundamental changes, the GHc has been in bearish mode for so long. In fact, as we speak, the appreciation seems to have halted, and turned the other way.
B. THE NONSENSE
Added to the noise are the predictions of the GHc achieving parity with US$ in the near future due to projected inflows of US$ on a number of transactions. On the face of it it makes sense right? It’s a simple demand and supply matter: you lack US$/too much GHc chasing the US$ and the GHc depreciates against the US$. So, it makes sense that once you pump/supply more US$ the reverse/inverse will happen. Now this is the point at which your nightmare starts. With your permission let me illustrate.
You have a bucket with a medium-sized hole under it. The bucket must hold water, but this hole is proving a problem, so you try to patch it up with soap. That didn’t work. Then you reasoned, “why don’t I start fetching water from another source and keep replenishing the water in the bucket.” If the rate of water inflow is faster than the rate of outflow through the hole in the bottom, the level of water in the bucket will remain constant/optimal. Four challenges arise:
1. How long can you sustain the process before diminishing returns set in
2. What is the cost of obtaining the extra water
3. What is the impact on the speed of flow on the hole in the bottom (i.e. the rate at which the ‘new water’ must flow to keep the level of the water in the bucket constant/optimal will either increase or decrease the pressure through the hole in the bottom, and widening it if the pressure is high. You end up with a large-size hole).
4. Where will you get some water, in the future, to ‘pay back’ the water you’ve borrowed? From the same bucket of course (which means no more constant/optimal level of water), OR, borrowing water from elsewhere.
In essence, without fixing the hole, you’re just indulging in self-delusion.
Quite clearly, it appears that the consensus view among Government’s policy makers, and supporters, is that this is a simple supply and demand issue, and the more inflows of forex, irrespective of the source and cost, the better, because in the short term, the GHc will appreciate. No one is talking about bridging the Current Account deficit in the long term. No one is talking about the unsustainable supply-side forex OMO by BoG not supported, except maybe proceeds from the Cocoa syndicated loans, by real assets/value. In other words, the majority of the expected inflows is debt. DEBT. As soon as it comes in, it’ll be going out. The market sentiment comes back to the real issues, and responds appropriately, by giving the GHc a good beating.
The tragedy is not in not being able to celebrate a ‘good thing’, like the appreciation of the GHc, but in the pyrrhic dance at the Gates of Hades we are being subjected to, only for dwarves and other spirit beings to be blamed when the tide turns.
If I were you, I will hold my US$, because what we are witnessing is an artificial propping up of a currency that badly needs to be backed by up real serious fiscal and monetary changes, and not propaganda.
PS: And oh, by the way, the effects of this “Dance” even if the charade is kept up for the purposes of “electoral gains”, will come back and bite your arse from 2017.
Author: Evron Hughes || Chief Strategist, Cambridge Capital Advisors Limited
