Accra: For Ghanaian businesses, the cost of certainty, rather than the direction of the cedi, is the critical figure to watch, and it has seldom been lower. The optimal time to manage currency risk is not during market volatility but when the cost of certainty is minimal.
According to Ghana Web, a finance director in Accra recalls an avoidable loss, illustrating a common scenario among businesses earning in cedis yet importing in dollars. Despite recognizing the risk and discussing potential actions, the team hesitated for a better rate. When the cedi fluctuated, the protected margins vanished, resulting in losses. This highlights the need for businesses to act while the cost of certainty remains low, rather than waiting for market volatility.
Every business factors exchange-rate assumptions into its budget, and the rate at the time of dollar payments decides whether the cedi supports or erodes yearly financials. The gap between these figures is what treasury departments aim to close. The focus should not be on predicting markets but on taking action when it's cost-effective.
Many management teams have exchange-rate assumptions but lack explicit uncertainty strategies. The crucial question is not where the currency will trade, but how much of next year's earnings depend on its settling rate. Successful firms are those that decide in advance which risks to retain and which to mitigate.
Ghana's exposure is quantifiable, with US$1.35 billion in foreign direct investment in 2023, capital linked to repatriation cycles, and a significant portion of merchandise imports from China. These factors mean that a substantial share of Ghanaian capital is destined to exit in dollars, and nearly a quarter of the import bill is influenced by a currency relationship outside Ghana's control.
Common habits seen across Ghanaian treasuries include waiting for better rates, mistaking market forecasts for treasury strategies, and buying protection after volatility arrives. Such behaviors underscore the need for businesses to review their strategies, especially as the interest-rate gap has narrowed, reducing the forward premium and making locking in rates more affordable.
The current market conditions, with a narrower interest-rate differential and a stable policy rate, present an opportunity for businesses to act. However, this window may not remain open, given potential inflation risks from Middle Eastern conflicts and rising crude oil prices, which could widen the rate differential and increase costs.
Boards should recognize this pattern and ensure their treasury policies are proactive, not reactive. A worked example demonstrates that locking in a forward rate can provide cost certainty, protecting against potential currency weaknesses.
Directors should ensure their businesses address crucial questions about earnings volatility, exposure retention, and treasury policy relevance. While volatility's timing is uncertain, having a defined FX strategy can differentiate between leading through cycles and reacting to them. Certainty is essential for navigating volatile markets successfully.