Rate hike a means of currency control

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“I think if we look at what’s happened in Turkey, what’s happened in South Africa, in the days where the African economies were so well linked to South Africa, they’re slightly more independent now. At that price, they now become more affected by the events in emerging markets,” Rand Merchant Bank head of Africa trading Roy Daniels told CNBC Africa.

“We look at the problems we’re experiencing in Turkey’s weakness and the general emerging market selloff across Brazil, Argentina, those factors will be now impacted into the countries in Africa that are seeing more Foreign Direct Investment coming in.”

Daniels added that due to the emerging market selloff, currencies will be expected to be under pressure. Nigeria’s naira, for example, has been under significant pressure in the past few months, prompting the central bank to intervene and add some dollars in the market to slowdown the weakening currecy.  

While this weakness hasn’t transgressed into the countries in East Africa just yet, currency pressures will nonetheless be across the board.

Turkey’s recent doubling of its interest rate, and South Africa’s increase of interest rates soon afterward, is a clear indication of growing economic pressures.

“The rate hike in South Africa signals that we’re not likely to see rate cuts in the rest of Africa,” Daniels added, explaining that a rate hike was sometimes used as a method to stem rising outflows.

“There’s always going to be a different view on this, whether that works or [not], what does it do. I believe that the operations are seen more as a smoothing-out operation. It doesn’t stop the outflow, [because] outflow happens. What it does, is tries to prevent [the taking advantage of] the genuine levers of cash by shorting markets,” Daniels explained.

“There are exchange controls out there, policies in countries to try and stop people shorting the currency, but somehow they do and possibly more so the local banks, the onshore banks, and it makes the cost of them borrowing the cash to fund a short local currency position a little bit more expensive.”