Strong US dollar increases credit risk – Moody’s

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RATING agency Moody’s Investor Service has warned that a strengthening US dollar since mid-April has increased the credit risk of several emerging markets due to currency depreciation.

A Moody’s report said a strong dollar would also lead to a drop in foreign exchange reserves of several countries including Ghana.
Other countries cited in the Moody’s report to suffer are Argentina, Mongolia, Pakistan, Sri Lanka, Turkey, and Zambia.
Factors that exposes countries
Moody’s Global Managing Director of the Sovereign Risk Group, Alastair Wilson warned that “countries with large current account deficits, high external debt repayments and substantial foreign-currency government debt are most exposed to the impact of a stronger US dollar.”
Cedi at record lows on emerging markets pressure
The cedi currency hit a record low on Tuesday, due mainly to global pressures as investors continued to exit emerging market assets, analysts told Reuters.
The currency of the major commodity exporter has weakened since the start of May, touching 4.8250 to the dollar on Tuesday.
“It is a combination of emerging market assets sell-off pressure and unmet corporate (dollar) demand,” a currency trader at a major lender in Accra told Reuters.

5.3% depreciation of cedi in 6 months
Cumulatively, the local unit depreciated 5.3 percent in the first six months, compared to 3.3 percent in the first half of last year, according to Reuters data.

Central Bank increases dollar sales
The central bank said last month it had significantly increased its weekly dollar sales to banks in support of the local currency.

The bank’s treasury did not respond to Reuters’ request for comment on Tuesday.
Investors sell their holdings?

According to some analysts, investors continued to sell their holdings in Ghanaian equities as the Cedi depreciates and the benchmark index extended losses.

Some analysts attribute the situation to speculative activities while others blamed it on repatriation of profits by multinationals.

Bank of Ghana assurances
The recent blip in the foreign exchange market that saw a slight depreciation of the cedi against the dollar is short-term and a reflection of a spillover from external developments, an official of the Bank of Ghana has said.
Mr Steve Opata, the Director, Financial Markets Department, told a section of the media that changes in global financing conditions, due to rising oil prices and hikes in US interest rates, were impacting frontier market economies in sub-Saharan Africa.

However, he said, Ghana is in a strong position to overcome the exchange rate volatility due to excellent economic fundamentals and a good external payments position.

“We want to assure the market that we have adequate reserves and the fundamentals do not support the slippages we have seen and we expect it to correct itself,” he said.

The slide in the currency is pushing the price of everything from sugar to fuel in a nation that relies on imports to feed an economy that grew by 6.8 per cent in the first quarter.

“In the case of Ghana, we strongly believe that staying on track with government’s fiscal consolidation plan, the strong trade surplus, narrowing current account balances, significant build-up in international reserves (now standing at US$8.1 billion and 4.4 months of imports cover), and declining inflation rates should moderate this impact,” he said.
He said the BoG would continue to assess the market and support with liquidity when necessary, adding that the global and domestic developments do not yet pose a threat to inflation in Ghana in the near term, adding that the BoG is monitoring the situation to take appropriate policy actions as required.

Source: Elvis DARKO || The Finder, Accra

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