Botswana caught between a strong dollar and weak China

Koobonye Ramokopelwa - BG reporter
Tuesday, 22 September 2015
Botswana caught between a strong dollar and weak China

The United States’ central bank (The Fed) decision to cut, raise or leave rate unchanged kept investors, economists and analysts waiting for nearly two days this week. Now that the decision has finally come out on Thursday, what matters is its impact in the coming months or years. Botswana Guardian polled two well-known local market observers-Head of Motswedi Securities, Garry Juma and Investment Analyst at Blackthread Capital, Karabo Tladi.

GARRY JUMA: MOTSWEDI SECURITIES
Botswana Guardian: The Fed Board of Governors is meeting this week (Wednesday and Thursday). What will be the impact of any rate adjustment decision taken on countries such as Botswana, which exports majority of its rough diamonds to the United States?
GJ: A rate hike by the US central bank would likely lead to a stronger dollar, and entice global investors to park more of their money in the United States instead of emerging markets. That could ultimately affect developing nations’ currencies, exports, and even employment levels.  Entities that have dollar denominated debts will start to experience an increase in debt service cost. 

The other negative effect of higher US rates will be the acceleration of capital outflows from China and emerging markets including Botswana. This is important because some emerging markets are heavily reliant on foreign inflows to fund fiscal or current account deficits. Any reduction in capital inflows into China will ultimately result in the second round of weakness in China’s economy and this will further have a negative impact on already weaker commodity prices, thereby further hurting commodity exporters (including Botswana).  The only positive from a weaker Chinese economy is a decline in global fuel prices, which we are already enjoying in Botswana. In summary, worst off are the commodity exporters (including Botswana) as we get caught between the strong dollar and a weak China.

BG: Most central banks in the African continent are loosening key lending rates to drive growth. In the event that the Fed hikes lending rate, as expected by many, will this have any influence on the next meetings of African central banks?
GJ: The influence is indirect. As illustrated above, the hike in US interest rates will certainly weaken most economies in Africa, which in turn will force their central banks to support their economies by lowering interest rates.
BG: Some central bank governors of emerging countries (who have been hit by the commodity crash) are favouring a rate hike, which can boost their economies, is their cause valid?
GJ: I don’t agree with this notion.  As shown above, any rate hike will also affect the growth of China’s economy, one of the world’s largest consumer of commodities and this will further weaken commodity prices.
BG: Washington-based International Monetary Fund (IMF) on the other side has warned the US against raising lending rate this year, as this would lead to the US dollar gaining in the process hurting emerging economies. Do you support this argument?
GJ: Absolutely. An increase in interest rates will boost the US dollar but weaken emerging market economies currencies, thereby hiking US dollar denominated imports of emerging economies. A typical example is what is happening to the Rand.
BG: In the event that the Fed leaves the rate at the current stable, does this mean we will see a further fall on commodity prices?
GJ: Depends with how the China’s economy recovers from the current slower growth, given that China has been the biggest driver of commodity prices.
BG: The US economy is blowing hot and cold. Is any rate hike going to help lift the world’s economic powerhouse and indeed the subdued world economy?
GJ: The world economy is still fragile and this has prompted even the IMF Chief Christine Lagarde, to warn of the “spillover” effect the Fed’s decision is likely to have on volatility in financial markets, especially emerging markets. Given that China’s economy is stuttering and emerging markets economies are still fragile, any rate hike will certainly worsen the recovery of the global economy in our view.
BG: At a political level, the US liberals and the democrats are dividend with the former calling for Yellen to hold rates while the latter thinks the opposite. Will the Fed be subjected to ‘politics” and leave rate stable?
GJ: It is our hope that at the end of the day the FED will make an appropriate decision which will be beneficial to the global economy at large, as raising rates would be a very negative signal — it would show that they are not aware of or don’t care about what happens in the rest of the world.

KARABO TLADI: BLACKTHREAD CAPITAL
Botswana Guardian: The Fed’s board of governors are meeting this week (Wednesday and Thursday). What will be the impact of any rate adjustment decision taken on countries such as Botswana, which exports majority of its diamonds to the United States?
Karabo Tladi: There is growing belief among investors around the world that the Fed would raise rates this year. But I personally don’t think the Fed would. If the Fed raises interest rates this would lead to capital outflow from emerging and developing markets around the world including Botswana. Rates in the US have been very low since the recession in 2007, leading to investors moving their investments away from the US to emerging and developing markets, chasing higher returns. The US is a consumer driven economy so a rate hike might negatively affect consumer spending in the country leading to possible decline in diamonds demand. However this could also, possibly lead to improvement in diamonds demand as the dollar gain ground against the pula leading to more exports of diamonds to the U.S.
BG: Most central banks in the African continent are raising key lending rates to drive sluggish growth. In the event that, the Fed raise lending rate, as expected by many, will this have any influence on the next meetings of African central banks?
KT: I think this will certainly have influence in their next meetings. Like I mentioned earlier; rates hike in the U.S will lead to capital flight from emerging and developing markets back to the U.S. This will cause most emerging and developing market currencies to lose ground against the U.S dollar. The Rand, which has been on a free fall against the dollar, will fall even more. So, African central banks’ governors might be forced to intervene to reduce capital flight and currency depreciation.
BG: Some central bank governors of emerging countries (who have been hit by the commodity crash) are favouring a rate hike, which can boost their economies, is their cause valid?
KT: I don’t think so. The reason why commodity prices have fallen so rapidly over the past months is largely due to cooling global economic growth led by the Chinese economy. Hiking rates at this point when the global economy has not fully recovered from the effects of 2007 financial turmoil and is still quite fragile is not ideal.   
BG: Washington-based International Monetary Fund (IMF) on the other side has warned the US against raising lending rate this year, as this would lead to the US dollar gaining in the process hurting emerging economies. Do you support this argument?
KT: Very much so, as I have already stated above.
BG: In the event that the Fed leaves the rate at the current stable, does this mean we will see a further fall on commodity prices?
KT: I don’t think so. I think commodity prices going forward will remain stable at current levels and if the Fed leaves rates unchanged at current levels.
BG: The US economy is blowing hot and cold. Is any rate hike going to help lift the world’s economic powerhouse and indeed the subdued world economy?
KT: No. I think it is too soon to hike rates. Rates hike will affect consumer and business spending in the U.S. This will be catastrophic for emerging and developing markets due to capital fight and currency depreciations. 
BG: At a political level, the US liberals and the democrats are dividend with the former calling for Yellen to hold rates while the latter thinks the opposite. Will the Fed be subjected to ‘politics” and leave rate stable?
KT: The Fed (board of governors) will not be affected by politics. They will do what they think is best for the economy. The Fed is looking at the U.S economy not the world economy.

Last modified on Tuesday, 22 September 2015 12:56

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