A United States interest rate hike will affect commodities dependent economies such as Zimbabwe as it will trigger a shift to money markets.
BY TATIRA ZWINOIRA
The US Federal Reserve is expected to raise interest rates by between 0,25 and 0,5 basis points. Plans were halted back in August to raise interest rates due to the on-going presidential election campaigns in the United States.
However, whoever wins the presidential race between Hillary Clinton and Donald Trump, the interest rates are still expected to go up.
A US interest hike involves American depository institutions such as banks and credit unions lending reserve balances to other depository institutions overnight, on an uncollateralised basis.
By charging the interest on reserve balances, the United States dollar appreciates, which in turn affects commodity prices.
Reserve Bank of Zimbabwe governor John Mangudya said commodities would be affected by an interest hike because when the prices fall, investors switch to money markets for a more stable investment.
“Thus, Zimbabwe being a mineral-dependent country might be affected if mineral prices go down,” he said.
The threat for Zimbabwe is mainly on gold artisanal miners who are contributing 45% of gold production, according to the central bank.
Both the central bank and the Finance ministry are targeting these artisanal miners by baiting them with lucrative support systems to bring in their gold.
“We have put together a $20 million facility which is for the small-scale gold producers which are artisanal miners.
“Why are we doing that? Small-scale artisanal miners contribute about 45% of the gold in Zimbabwe and we think that the best way forward is to help them so that they can produce more gold,” Mangudya told Standardbusiness in an earlier interview.
“We have got more than 13 million tonnes of gold underground in reserves.
“So far, from 1980 [as of two weeks ago], we have only mined 585 tonnes of gold in 36 years!”
Part of the plans to entice artisanal gold miners involve an export incentive bonus scheme and the review of royalties on gold, as well as that on some levies and fees being levied by rural district councils and the Environmental Management Agency.
“We have got gold that has been going down, and platinum too.
“We know that the prices of commodities have been going down and that is a fact…fact number three is that the United States dollar has been appreciating against all the currencies and therefore Zimbabwe is not very competitive,” Mangudya said.
He warned that the strengthening of the US dollar would further sink commodity prices and force artisanal gold miners to smuggle gold to the black market in Dubai and South Africa.
Last year, the US Federal Reserve raised the interest rates in December, which strengthened the dollar but led to a global fall in commodity prices.
The fall in commodities led to the United Nations Economic Commission for Africa projecting the lowest growth in the southern region of the African continent of 0,5% to 3% by year end.
Southern Africa is known as a commodity market-dependent region.
The prospect of a hike in the United States interest rates comes at a time when the mineral output for gold, platinum and nickel is expected to remain on a positive trend.
Artisanal miners are mainly found in communal areas and have chosen a life of gold panning in order to get extra income as the economy worsens.
Gold and platinum are the biggest exported minerals, with projections expected to be 24 000 and 16 500kg respectively by the end of the year.
Zimbabwe’s revenues from gold exports rose to $415 million for the first half of the year from $340 million recorded in the same period in 2015.
The value of mineral output for the first half of 2016 was up by 8, 8% to $806 million, from $741 million during the comparable period in 2015.
“It is going to affect Zimbabwe indirectly in that if the interest rates go up, the gold prices go down.
“People begin to earn money now by banking their money. They will sell the gold to earn a good rate of interest.
“So if lots of people decide to sell gold at the same time, the gold price will go down and that will be the effect on us,” economist John Robertson said.
He said if the gold price weakened, the South African rand would go down to what it used to be during months of market volatility.
“If the gold price goes down again, the rand will weaken to R16 or R17 to the United States dollar and we are already uncompetitive to South Africa, which would make us even more uncompetitive,” Robertson said.
“It would not be good news from that perspective so we would have to organise ourselves to become better producers and attract investment.”
When commodity prices took a slump, regional currencies fell hard against the US dollar, the worst hit being the South Africa rand.
Economist Prosper Chitambara said such a scenario would affect Zimbabwe in the sense that low commodity prices would see people preferring to hold more cash as the values would be appreciating.
“It affects countries like Zimbabwe who rely on its commodities,” he said.
During the commodity prices drop, the South African rand fell to its lowest in the country’s history.
This meant that Zimbabwean exports became more expensive to South Africa, which accounts for 68% of the exports.
However, Chitambara said a potential spill of the effects of an interest hike could be on lending and borrowing rates.
“An interest rate is the price of money; when an interest goes up it means the value of money goes up,” he said.
“As Zimbabwe, we are using the currency as our anchor currency so it is making our exports more expensive…so it will make us uncompetitive and worsen our balance of payments.
“We cannot do much to mitigate such an impact. Our degrees of policy freedom are very limited because we are in a dollarised market.”