ZIMBABWE’S 1,7% growth projections in 2017 have been thrown into serious doubts following the increase in interests rates by the United States Federal Reserve on Wednesday by 0,25 basis points to a range of between 0,5% and 0,75%.
BY TATIRA ZWINOIRA
The move will see investors shifting to money markets from commodities. The shift will result in commodity prices going down.
In his 2017 National Budget, Finance minister Patrick Chinamasa projected a growth rate of 1,7%, anchored on growth in agriculture and mining sectors.
He anticipated moderate improvements in international commodity prices, fruition of planned mining investments and benefits from ease of doing business reforms.
Financial expert, Persistence Gwanyanya told NewsDay that due to Zimbabwe and the Southern African region being commodity-based markets, the country’s trade would remain uncompetitive, as the interest rate hike means a firming of the United States dollar.
“But, I do not expect a significant firming of the dollar because the issue of increasing the interest rates has been talked about for a long period of time now, such that investors, businesses and a number of economic agents have already factored that anticipated increase in their pricing models,” he said.
Gwanyanya said trading on the commodity markets would suffer lower prices, especially gold.
“Gold as an alternative investment becomes less lucrative in view of a firming United States dollar,” he said.
In a report for the week ending December 2, the central bank said gold prices had declined by 1,8% to close the week under review at $1 178,83/ounce, from $1 200,62/ounce recorded in the previous week.
“The decline was attributed to a continuous appreciation of the US dollar, resulting in speculations of a tightening monetary policy in the US,” the central bank said.
In October, gold sales averaged $1 257,10, while mineral prices remained depressed during the period, as the negative trend of commodity prices gained steam.
Gold and tobacco are the biggest exported products in the country. Exports account for 60% of liquidity.
A commodity price drop may deter small-scale artisanal miners, who contribute about 45% of the gold in the country through formal channels in favour of the parallel market in South Africa and Mauritius.
A senior economist agreed the increase had not taken the market by surprise, as there were hints of a Fed rate hike,
However, the economist said the commodity prices weakening may not be as strong due to US President-elect Donald Trump’s infrastructure development prospective, which can sustain demand for metal commodities.
“To me, the delays in accessing the foreign exchange are more damaging than the commodity prices. From a business prospective, if you experience a delay of more than two weeks, that can really hurt your business because you have costs that you have to incur,” the economist, who declined to be named, said.
Central bank governor, John Mangudya is on record saying Zimbabwe, being a mineral-dependent country, will be affected if commodity prices plummet.
This comes despite increased significant growth in output for minerals such as gold, platinum and nickel.
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 US dollar appreciates, which in turn affects commodity prices.