'Hedging Should Favour Ghana'

The immediate past Governor of the Bank of Ghana (BoG), has deepened the debate on hedging as a measure for the country to get around crude oil price hikes, suggesting that policy makers should consider clever hedging arrangements that can optimise gains for the country.

Dr Paul Acquah said there was the need for a dispassionate debate on the entire risk contained in the exercise, its impact on the budget and entire finances of the state, as well as the duration the hedge book could be maintained, as that was important to price changes.

“Depending on how skillful the formulation of the terms of the hedge, the country can make gains or lose out in a hedge arrangement,” the immediate past governor told a section of the media when asked for his thoughts on how Ghana could mitigate risks associated with the economic outlook.

This was at the press briefing by the Monetary Policy Committee (MPC) of the BoG on September 23, which also happened to be his last address as governor of the central bank.

“The optimal arrangement is a matter of policy choice, taking into consideration how the public receives it,” the immediate past governor said when he answered questions on how Ghana could mitigate risks in the economic outlook, which included potential volatilities in the price of crude oil.

Dr Acquah, who spoke dispassionately on his last day as Chairman of the MPC – the BoG sub-committee which reviews the economy periodically and subsequently takes monetary decisions – said as a matter of policy, Ghana should also pre-determine the amount or price that it was ready to pay, taking into consideration the frequency of price changes.

This means that the country needs to identify the price levels that will make the oil bill sustainable or otherwise, as well as how the domestic economy can adjust to that price during the hedge period.

Hedging is an arrangement to reduce or control risk by taking a position in the futures market with the objective of limiting risk associated with price changes. It is a zero-sum game that leads to a gain or loss in cash position due to changes in price levels.

Ghana hedging for price means it will settle on a price at which it wants to purchase crude oil within a period of time, with the objective of ensuring certainty in the country’s oil bill over the period. It makes gain once the existing price on the market rises above the hedge price, but there is loss when prices fall far lower than the hedge price.

Dr Acquah advised that the country should also ensure that surplus funds accumulated from any such hedge should be saved for a rainy day and not used for other purposes as a free spending fund.

“This is where a stabilisation fund is important; but governments always see this as a source of financing for immediate use,” Dr Acquah noted.

Stabilisation funds are monies set aside for specific contingency purposes, such as retiring a loan or serving as an insurance against economic shocks, the more reason why economic managers need to exhibit a lot of prudence to keep the funds for only those purposes.

Volatilities on a country’s foreign exchange market can also affect the type and structure of a hedge arrangement. The volatility in Ghana’s exchange market eased in the third quarter. Developments in the exchange rates of the cedi against the three core currencies – the US dollar, the pound sterling and the euro – show that between January and August 2009 the cedi depreciated, cumulatively, by 16.7 per cent against the dollar, 24.7 per cent against the pound sterling and 17.5 per cent against the euro.

In year-on-year terms, the comparative depreciations were 12.9 per cent, 5.4 per cent and 12.5 per cent, respectively.

The depreciation, however, slowed down after the first half of the year and the cedi appreciated by 1.7 per cent and 0.5 per cent against the US dollar and the pound sterling, respectively, in August.

Dr Acquah pointed out in his address that there were signs of stabilisation in prices and in the exchange market, with inflation expectations beginning to turn around.

“Consumer price inflation, as well as core inflation, remains high around 20 per cent, but the recent monthly increases have been modest and there are signs of reduced volatility in prices and in the exchange rate of the cedi against the major currencies,” he said.

He said the government’s prudent fiscal policy and a tightening of monetary and credit conditions were also exerting downward pressure on prices as growth eased downward and closed in on the trend.

Dr Acquah premised the BoG’s decision to maintain the prime rate on the balance of risks in the outlook of the economy, which included risks relating to the speed with which oil prices might rebound, with recovery of global demand from the financial and economic crisis.

However, while fiscal consolidation was taking place, domestic revenue mobilisation and donor disbursements were recording shortfalls as against payments of domestic arrears that had necessitated the retirement of some arrears, which the MPC feared could add some stimulus to the economy.

That notwithstanding, the MPC thought it was still wise to maintain the prime rate at 18.50 per cent because the risks to inflation and growth appeared well balanced, with policies being implemented to reduce inflation, which had begun to close in towards the 14.5 per cent target for the year.

Story : Samuel Doe Ablordeppey Share Your Thoughts on this article Name Email Location Comments Graphic Ghana may edit your comments and not all comments will be published