Sunday, June 23, 2024

Interest Rate Hikes: will Botswana catch SA’s sneeze? 

The continent’s most advanced economy and Botswana’s biggest trading partner, South Africa, has hiked its main interest rate to a 14-year high, in a bid to curtail inflationary pressures.

On Thursday, the South African Reserve Bank (SARB) raised its repo rate by 50 basis points to bring it to 8.25 percent, making it the tenth hike since November 2021. The SARB governor Lesetja Kganyago said the tight monetary policy was a bitter medicine for an economy that strongly needs it, citing the need to tame inflation.

The tight monetary policy that SARB has been implementing has managed to slow the inflation rate pace. The annual inflation rate dropped to 6.8 percent in April compared to the 7.1 percent in March. However SARB forecasts that the inflation rate for 2023 will average 6.2 percent, higher than the initial projection of 6 percent. The SARB is attempting to bring the inflation rate within the target range of 3 – 6 percent.

Back home, the Bank of Botswana (BoB) in its recent monetary policy committee sitting in April decided to maintain the monetary policy rate (MoPR) at 2.65 percent. The last time BoB hiked the rate was in August, raising it from 1.65 percent to the current rate. 

Botswana’s inflation rate in the first quarter of the year averaged 9.4 percent, lower than last year’s average of 10.4 percent. Inflation decreased to 7.9 percent in April from the prior month’s 9.9 percent. However, consumer prices are still higher than Bank of Botswana’s objective range of 3 to 6 percent. BoB anticipates inflation will only revert to the objective range in the second quarter of 2024.

To assess the impact of SARB’s latest interest hike on the Botswana economy, Sunday Standard (SS) spoke to Pelotelele Motshidisi, an investment analyst at Kgori Capital, an asset management firm in Botswana. 

SS: South Africa (SA) is Botswana’s biggest trading partner. Will the SARB hike contribute to imported inflation? 

Motshidisi: The hike in interest rates in South Africa has been implemented in light of elevated inflation and upside risks. On the one hand, if successful, the hike will bring down SA inflation subsequently relieving pressure on the price of goods in the country and thereby having the effect of bringing down Botswana’s import bill. 

On the other hand, by raising interest rates, this could make South Africa’s assets more attractive to foreign investors which will increase the demand for the Rand, making it stronger. A stronger Rand will result in a higher import bill for Botswana. Furthermore, these two points are in isolation of other factors such as load shedding and geo-political issues, among others.

SS: By raising the repo rate, does it create pressure for BoB to hike the bank rate as well to stem capital outflows? 

Motshidisi: There is a need for Botswana to keep interest rates competitive with the rest of the region (SADC) in order to avoid capital outflows. However, it is unclear what the threshold interest rate differential (between Botswana and the rest region) is, that will trigger these outflows. 

One would assume it would currently be larger than it normally would be given the difficulties that the SA economy is facing. Therefore, it is unlikely that BoB will face any significant pressure to raise rates solely to keep parity between us SA and SADC as a whole.

SS: As an asset management company, what impact does the high interest rate in SA have in your line of business? 

Motshidisi: We recognize that high interest rates in SA can have diverse impacts across various asset classes, and it is crucial to approach this development with sensitivity. The recent 50 basis points rate hike by SARB may have implications for various asset classes. 

Equity investments may face potential challenges due to increased borrowing costs for companies, which could impact corporate profitability and, subsequently, the performance of equity portfolios. It is however very pertinent to carefully assess the implications of such on equity investments and adjust strategies accordingly. 

The rate hike could potentially benefit fixed income investments, particularly newly issued fixed income instruments. Higher interest rates can lead to higher bond yields, delivering potential opportunities for our clients to generate positive returns. To optimize performance, however, it is critical to carefully analyse current market conditions and identify suitable fixed income instruments. 

High interest rates may also affect other asset classes, such as real estate and alternative investments. These effects can vary depending on real estate market dynamics, investor sentiment, and the specific characteristics of alternative investments. Thorough analysis and diligent risk management are required when evaluating these asset classes in the context of changing interest rates.

It is important to note that the overall impact of high interest rates on asset managers varies depending on a variety of factors, including the specific investment strategies used and market conditions. We constantly assess these factors and make informed decisions in order to navigate the potential opportunities and challenges presented by interest rate changes.

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