Saturday, September 19, 2020

Economists rule out negative impact of USA mortgage crisis on Botswana

Economic observers said last week that the current mortgage crisis in the US will have some “muted impact” on Botswana despite some warnings from the world’s richest country that it might lead to a recession.

“We expect the effect (of the mortgage crisis) to be muted because indices have not gone down. Overall, we do not expect its impact to be severe,” top officials at Bank of Botswana said last week.
The USA economyÔÇöwhich is the biggest in the world and the world’s leading diamond consumer ÔÇö has been dragged into a spate of panic following mortgage lenders who dole out financial assistance to home- buyers at sub prime rates during the time of low interest rates.

Some of the home buyers who benefited from the scheme were unable to service their loans when interest rates were adjusted upwards when inflation rose. For the last three weeks, the crisis has been spreading across Europe and Asia as a result of a currency trade that was sparked by low interest rates in the USA. That means home buyers in other parts of the world were able to raise mortgage loans in the USA to avert high interest rates in their own countries but that lead to the spread of indebtness to those countries.

Because of the inter-relations of those economies now the crisis affected almost everyone including the banks and hedge funds which invested in those sub-prime mortgage lenders.

One of the USA lending mortgage lender Countrywide said Thursday that the current problem might lead to a recession sparking fears among banking sectors investors who were already wary of the banking sector stocks. Over the period, bourses in the major cities of the world were in a near free fall as investors were in a stampede to exit banking stocksÔÇöand the big emerging markets such as South Africa caught the flue that was compounded by their free floating currencies.

The rand has been in a tumble against the USA dollar as investors were trying to duck-out of the second round effect of the USA mortgage crisis.
“The problem with the exchange trade funds is that when the US has a problem then everything starts to unwind. However, the central banks across the world have tried to inject some credit into the market to stabilize the situation,” the central bank said.

However, it said if the problem is prolonged, it would affect the foreign reserves negatively and Botswana’s exports to the developed countries. Some of the exports which are expected to feel the pinch are beef and diamonds, which are the mainstay of Botswana’s economy.

“This would affect Botswana’s imports because of the restricted lending in those countries,” the Bank said.

Commenting on the same issue, Investec Assets Management Botswana analyst based in Cape Town, Alphonse Ndzinge, said “The credit markets are experiencing liquidity problems.┬á These are real and of serious concern to the global financial markets. Nevertheless, there is no evidence yet, however, of a credit crunch that would impact the overall US economy.┬á So long as this remains the case, a crash on global stock markets is unlikely.”

┬á“By cutting the discount rate, which provides funds to US banks, instead of the fed funds rate, which has more impact on consumers and commercial rates, the Fed clearly signalled that it believes problems are mainly confined to the financial system, and are not yet impacting the broader economy. However, the full impact on the US economy from the current turmoil will only be seen in the coming months,” he said.

He said if the problems do spread to the wider US economy, the global credit crunch has the potential to slow Botswana’s economic growth this year. Essentially, any drastic slowdown for the US economy will impact other major economies that are highly dependant on consumer spending in the US, which isn’t good news, especially for Botswana exports.

“There has been a global equity sell off on most major markets in the last few days as investor’s continue to revise their general view of risk. Although this isn’t encouraging news for offshore invested savings, such as pension funds and foreign reserves, the scale of the impact will be dependent on the respective asset allocation decisions for these savings. For instance, equities (mainly financials) on most developed markets have generally performed poorly while bonds have rallied,” he added. ┬á

RELATED STORIES

Read this week's paper

Sunday Standard September 20 – 26

Digital copy of Sunday Standard issue of September 20 - 26, 2020.