US Federal Rate Hike- South Africa a Loser

2015-12-17 10:08

As expected the US Federal Open Market Committee has finally taken the United States- world’s biggest economy off life support. This happened on Wednesday when the US Fed Chair Woman-Janet Yellen announced a 0.25 percent rate hike for the first time since 2008. What does this mean for the US economy? On the one hand, the U.S. government deficits will rise, insurance companies will get relief and savers -- who’ve weathered years of earning next to zero -- will continue to survive on the benefits of this rate hike.

The rate hike sounds a new era in the US- and world economy despite the fact that it was expected. Various stakeholders especially those new in the finance and investment world have only been exposed to zero interest rates since December 2008 and now enter a completely new era. Various analysts have identified a couple of winners and losers of this policy especially in the US.

Losers in the US include: the US Federal Budget which is expected to pay out close to $2, 9 trillion more in interest over the next ten years if the interest rate hike trend continues. Another loser in the US will include US Auto makers who will be expecting a decreased demand as prices slowly escalate due to increased interest rates by commercial banks.

Winners in the US will include: Savers, who should expect better rates on their savings accounts as interest rates improve. Long Term Treasuries and Corporate Bonds are another group to benefit as the interest rates continue to rise into 2016 and beyond. One should expect increased buying of debts by corporate pension managers as they expect higher yields with increased rate hikes. US banks should also be expected to benefit from this rate hike as earnings rise with rising bank rates.

What does this mean for South Africa?

The news of interest rate hike in US could not have come at a worse time for South Africa. The SA economy is currently battling with the so-called “evil triplets”- poverty, unemployment and inequality at alarming rates. This is being made worse by slow economic growth, political scandals, high food prices, among other factors. One should therefore expect the US FED interest-rate rise to weaken the SA economy further. National debt in SA continues to increase and the rising interest rate in the US does not make things better.

Our equity markets will progressively begin to see investors moving assets to other low risks markets including the US. This happens at a time when South Africa continues to make strides to avert a ratings downgrade to junk status. The SA government will be expected to show decisive leadership to restore investor confidence in the economy. This will go a long way to reduce the impact of the US FED rate hike of the economy of South Africa and its investors.

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