Following the sharp depreciation of the Chinese Yuan on Monday, which took it to below the politically sensitive level of seven yuan to one United States dollar for the first time in 11 years, currency traders and international merchandise traders alike in Ghana are waiting to see what happens next with bated breath.
While the Yuan’s depreciation on its own is having little immediate effect on exchange rates in Ghana – the Yuan is not yet officially convertible here, but the US dollar remains the intervention currency through which exchange rates against all other currencies are derived – the real possibility of a currency exchange rate war between the world’s two largest economies is persuading business interests in Ghana to prepare for significant changes in the economic environment in which they operate.
Reactions on the local foreign exchange market have been mooted so far. During the first two days of this week, the cedi appreciated by a marginal 0.11 percent against the dollar, trading at GHc5.39756 by Tuesday afternoon.
However this, coupled with Monday’s depreciation of the Yuan against the dollar enabled one Ghana cedi to buy more than 1.3 yuan for the first time since the beginning of this year. One Ghana cedi had been hovering at between 1.27 and 1.28 yuan during the first half of the year, but by Tuesday, could buy 1.30 yuan.
Crucially however, the cedi-dollar exchange rate remains the most pivotal variable in the ongoing exchange rate adjustments, the cedi-yuan rate inclusive. Currency traders in Accra explain that even with banks such as Stanbic, Ecobank and Fidelity, which now offer direct sales of yuan to their customers, most transaction rates are still determined by the dollar’s exchange rate with both of the other currencies – the depth of direct yuan availability from Chinese sources of supply who need cedis to fulfill business contracts in Ghana remains shallow compared with the total volume of private sector financial flows between China and Ghana.
On its own, without any change in the dollar’s strength against the cedi, the yuan’s depreciation offers Chinese exporters to Ghana a bigger market share of this country’s basket of merchandise imports and more worrying, better price competitiveness against locally manufactured alternatives. The cedi’s recent appreciation against the dollar, begun in mid-July, stands to further worsen the plight of local manufacturers.
However, the biggest uncertainty – and which currency and merchandise goods traders alike are centering most of their attention on currently – is the real possibility that the US may opt to decide in kind by engineering the depreciation of the dollar to restore the competitiveness of American exporters relative to the competition from Chinese their Chinese counterparts. Instructively, US President Donald Trump, who has been spearheading a trade war against China since early 2018, has official declared China a currency manipulator despite the latter’s protests that Monday’s exchange slide was simply the result of market driven yuan depreciation. Indeed, there is a growing conventional wisdom that China is “weaponizing” the yuan’s exchange rate as part of its effort to win that trade war.
President Trump has asked the US Federal Reserve Bank to “take note” of China’s actions, which many see as a warning that America is considering opening a currency exchange rate war as the new front for the ongoing trade war between the two countries.
If that happens, then Ghana’s cedi stands to appreciate significantly, a situation which the local populace would interpret as an economic gain. However. the Association of Ghana Industries warns that local manufacturers would be hard hit by this as imports from abroad would become more price competitive relative to their locally produced alternatives. This would put Ghana’s current hard won merchandise trade surplus and resultant current account surplus at risk, a situation that would be significantly made worse by the loss of international price competitiveness that exporters would suffer from an appreciating cedi over the sshort term.
Consequently, the main sentiment across local industry in Ghana by mid-week has been cautious hope that the exchange rate dispute between the world’s two biggest economies is that will not go any further.