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SocGen Sees Ghana Inflation to Lower Gold Speeding Cedi Fall

Ghana’s cedi may depreciate a further 10 percent from a record low against the dollar by year-end as inflation accelerates and a weaker gold price reduces foreign exchange inflows, according to Societe Generale SA.

The currency of Africa’s second-biggest bullion producer will probably fall to 2.4 per dollar before the start of 2014, Souheir Asba, a London-based emerging markets strategist at SocGen, said in an e-mailed response to questions. The cedi has lost 11 percent against the dollar this year to trade at 2.15 per dollar as of 8:08 a.m. in Accra, the continent’s worst performer after the rand and Namibia’s dollar, which is pegged to the South African currency.

The gold price has slid 18 percent this year, which may cost Ghana $2.6 billion in lost foreign exchange for 2013, made up of $2 billion in revenue and $600 million in mining-related foreign direct investments, Asba said. Inflation accelerated to 11.8 percent in July, from a revised 11.6 percent in June, after the government completed the scrapping of fuel subsidies. The Bank of Ghana is targeting an inflation rate of 9 percent for the end of December and an 8.9 percent average for 2013.

“The slowdown in U.S. dollar inflows is expected to cause a U.S. dollar shortage in the Ghanaian market, which will definitely put the cedi under further pressure,” she said on Aug. 20. “Following the total removal of the subsidies, we see inflation accelerating even higher to breach the central bank target.”

Cedi Stabilization

The government expects the cedi to stabilize as foreign-exchange reserves increase following the receipt of proceeds from the sale of international bonds, Kwabena Oku-Afari, director of the real-sector division of the Finance Ministry and a member of the economic policy coordinating committee, said by phone from Accra on Aug. 21. Ghana’s foreign-currency holdings rose to $5.6 billion as of Aug. 20 from $4.9 billion a month earlier, according to the central bank.

The world’s second-biggest cocoa producer raised $750 million of 10-year debt at a yield of 7.875 percent on July 25, part of which will be used to pay off domestic debt. Yields on the notes rose two basis points, or 0.02 percentage point, to 8.27 percent, for a 27 basis-point increase this month. Rates on dollar-denominated bonds for African countries have increased 12 basis points this month to an average 6.90 percent yesterday, the highest since November 2011, according to JPMorgan Chase & Co. indexes.

“Even though inflation is rising after fuel subsidies were scrapped, we don’t foresee significant impact on the exchange rate, given the growth in foreign reserves,” Oku-Afari said.

Swapping Dollars

Last year, 11 out of 12 gold mining companies switched 20 percent to 100 percent of their dollar revenue for cedis with the central bank, according to the government. This means that “even though falling gold prices is adverse to the balance of payments position, it will not significantly affect the gross international reserves,” he said.

Food inflation may slow as the harvesting season starts, while the bond sale will bolster foreign exchange reserves, helping to stabilize the cedi, Yaw Adu-Koranteng, a research analyst at NDK Financial Services Ltd. in Accra, said by phone yesterday. The cedi will probably weaken to 2.2 per dollar by year-end amid higher imports before the festive season, he said.

Proceeds from the bond sale will do little to help the currency amid sustained demand for dollars, according to SocGen’s Asba.

Gold was unchanged at $1,376.19 an ounce. SocGen predicts that the bullion price will fall to as low as $1,150 an ounce by 2014. Ghana’s gold export earnings declined 16 percent to $2.7 billion in the first half from a year earlier, the central bank said July 31. The precious metal was the nation’s biggest export in 2012 at $5.6 billion.

Ghana’s central bank will probably reduce dollar sales to banks and companies to keep bolstering reserves, said Asba. “This will subsequently cause the cedi to depreciate at a higher pace,” she said.

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