Fed gives SA breathing room on rates

Source: Rene Vollgraaff and David Malingha Doya – Fin24, 21/09/2015

Johannesburg - African policy makers worried that the US Federal
Reserve`s liftoff will roil their markets even further, have room to
breathe. For now.


Central banks across Africa have bucked a global trend by tightening
monetary policy to ward off inflation threats as their currencies
slumped against the dollar. For South Africa, Nigeria and Kenya -
three of the four biggest economies in sub-Saharan Africa that will
decide on interest rates this week - the Fed`s decision to delay
raising borrowing costs gives them a temporary reprieve.


"We should see less hawkish monetary policy committees next week,
particularly in the countries where the currencies have come under
pressure," Yvonne Mhango, an economist at Renaissance Capital in
Johannesburg, said by phone on September 18.


From Ghana to Zambia, African currencies have been among the worst hit
by a slide in investor sentiment toward emerging and frontier markets.
The prospect of higher US interest rates is driving investors away
from riskier assets at the same time as a slowdown in China fuels a
slump in global commodity prices.


In South Africa, where the rand has weakened 12% against the dollar
this year, the central bank has raised the benchmark interest rate
twice since July last year, even as the economy risks falling into
recession for the first time since 2009. Eighteen of 20 economists
surveyed by Bloomberg forecast the Reserve Bank will leave the key
rate unchanged at 6% on September 23, with two predicting a 25
basis-point increase.


"Following the Fed`s decision to hold back, I think the most probable
outcome for our MPC would also be unchanged interest rates," Elize
Kruger, an economist at KADD Capital in Johannesburg, said in an
emailed note to clients. This is "predominantly due to the
deteriorating local economic outlook and lower oil prices".


Investors have pared back bets of higher borrowing costs in South
Africa this year, with forward-rate agreements starting in three
months, used to speculate on interest rates in the period, pricing in
20 basis points of increases, down from 45 basis points on August 24.
Yields on rand-denominated government bonds due December 2026 climbed
nine basis points this year to 8.35% on Friday. Yields on Kenya
shilling bonds due October 2024 rose 80 basis points this year to
12.8%, while in Nigeria, rates on naira debt maturing in March 2024
rose 48 basis points to 15.61% on Friday. That compares with a drop of
19 basis points to 4.83% in average yields on the Bloomberg Emerging
Market Local Sovereign Index.


Nigeria and Kenya, which are due to announce rate decisions on
Tuesday, are set to keep their benchmark rates at 13% and 11.5%
respectively, according to most of the economists surveyed by
Bloomberg. The Kenyan shilling has slumped 14% against the dollar this
year, prompting the central bank to raise borrowing costs by 300 basis
points since June.


The Fed`s decision provides the Central Bank of Kenya "an opportunity
to freeze rates", Robert Bunyi, managing director of investment
company Mavuno Capital, said by phone from the capital, Nairobi. "If
the Fed had raised rates, it would have put more pressure on the
shilling as the dollar appreciates, and as money flows back to US
Treasuries."


Ghana`s action
In Nigeria, Governor Godwin Emefiele has kept the policy rate
unchanged since raising it by 100 basis points in November. He has
resisted pressure to devalue the naira following a slump in oil
revenue, imposing foreign-exchange restrictions instead to stabilise
the currency.


Ghana`s central bank took pre-emptive action by raising the benchmark
interest rate by 100 basis points to 25% three days before the Fed`s
announcement last week. Finance Minister Seth Terkper said in an
interview on Friday that the delay in monetary-policy tightening in
the US is good news and "with the worrying signals, particularly from
China, the Fed decision gives relief to emerging markets".


That reprieve may not last long, particularly for African countries
running large fiscal and current-account deficits, according to
Moody`s Investors Service. Nations such as Ghana, Uganda, Nigeria,
Angola and Zambia are facing the prospect of possible outflows because
of higher US interest rates, Rita Babihuga, an assistant vice
president at Moody`s, said in a report.


"Everybody will still be looking ahead as to when the potential US
rate hike will come and the potential impact," Ridle Markus, an
analyst at Barclays`s Africa unit, said from Johannesburg. "For now,
they are relieved that it has not happened."