Exporters loose due to Repo rate hike

Companies and individuals who wish to sells goods to international markets will face financial constraints due to a too strong currency as the South African Reserve Bank hiked the Repo rate, with the aim to induce the South African Rand to become too strong.
Standard Bank Namibia’s Manager of Economics and Market Research Mally Likukela said although this was a good move, it presented in itself a lot of dangers associated with a too-strong currency.
“If our local currency is too strong, it means it will be harder to sell Namibian made products globally, which would be bad for economic growth,” said Likukela.
An interest rate increase will make the SA Rand and the Namibian Dollar more attractive as an investment, causing their value to rise against foreign currencies. Likukela said a more valuable currency is damaging to exporters since it makes their goods relatively more expensive when translated to other currencies.
An interest rate hike of 25 basis points (bps) that is expected to be announced on the 17 February will impact everyone who has a home mortgage, car loan, savings account or money in the stock market.
“In short, life is about to get better for savers and a little harder for borrowers. Investors won’t escape the wrath either as they could also face tougher times,” he said.
Likukela added that for a long time in Namibia, savings and money market accounts had offered very low interest on average ranging between 4.5% and 4.9%, therefore the Bank of Namibia’s recent announcement to make borrowing expensive because of yield across the board will now become favourable.
However, existing home and car owners including anyone with an adjustable loan will feel the pinch greatly from this Repo rate hike, while commercial banks are seen as probably the biggest winners in this game.
“As you know, banks make money by borrowing at low short-term interest rates (imagine checking and savings deposits) and lending it out at higher, longer-term rates. So a rate hike will give banks a window of opportunity to earn more attractive ‘spreads’ once the Bank of Namibia moves,” said Likukela.
Most people prefer to invest in stock markets and stock prices are determined by future profits that corporations will generate. At very low interest rates, companies are able to borrow larger sums of money to fund the undertaking of projects that should yield some positive return.
Likukela explained that consumers may also cut back on purchases, which will negatively affect companies’ revenue numbers and cause further damage to their bottom lines.
“Low interest rates have also encouraged traders and speculators to bid up the price of stocks as they are able to purchase shares on margin. If interest rates rise, the cost of leverage will also rise, causing these stock owners to cut down their holdings by selling stocks in the market,” he concluded.

Related