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How Brexit could impact SA interest rates

Cape Town - In the worst-case post Brexit global scenario, the SA Reserve Bank (Sarb) may be left with little choice but to raise interest rates further, should the rand take a major hit, Rian le Roux, chief economist of the Old Mutual Investment Group (OMIG), warned on Friday.   
 
However, in a milder global outcome, with relatively little impact on commodity prices, capital flows and the rand, he thinks Sarb will keep rates unchanged for an extended period.

"While our financial markets will pretty much echo global markets in the short term, the medium-term impact on SA will be determined by the extent to which commodity prices, SA’s export volumes and capital flows to SA are affected. Still, SA’s already poor growth prospects will be further undermined, although the extent of which remain uncertain at this stage," said Le Roux.

As far as the direct impact of a likely recession in the UK will have on SA, OMIG estimates it to be relatively small, as the UK "takes" only about 4% of SA’s exports. However, one area that might be negatively affected, in his view, is tourism, as the UK is responsible for about 18% of tourist arrivals from outside Africa.
 
"The current global turmoil and likely negative impact on the world economy highlight the fact that SA cannot rely on the world economy to drag us out of our slow growth trap and that the urgency to speed up growth-enhancing structural reforms has just ratcheted up another notch," cautioned Le Roux.

"As to how bad the impact on the world economy might be, considerable uncertainty exists, so the actions of global policy makers will be key. If the UK’s decision leads to renewed concerns about a eurozone breakup, global economic and market uncertainty and confidence, in general, will be more negatively affected, and likely over a more extended period too."

Brexit impact on investments
 
Given the global significance of the Brexit decision, investors can expect considerable volatility in the short-term, according to Hywel George, director of investments at OMIG.

The immediate market reactions have been largely as expected, according to Le Roux. Equity markets are down sharply, the dollar and yen have surged, the euro and especially the British pound have slumped and bond yields outside of Europe fell in the rush to safe haven assets.

According to Le Roux, the stronger dollar will likely also put pressure on emerging market currencies - including the rand - and as concerns over the global economy mount, capital flows to the developing world will likely also come under pressure.
 
In George's view, investors can expect considerable volatility at least until the medium- to longer-term consequences of the UK leaving the European Union (EU) become clear.

"As an emerging market, SA is likely to be caught in the cross winds of this risk-off investment environment. I am confident, however, that within a context of extreme volatility, opportunities will arise," said George.

According to Graham Tucker, Old Mutual Balanced Fund portfolio manager, in the current low growth and uncertain world one could expect policymakers to provide considerable liquidity lines to the global banking system in the short term, so as to support global financial markets.

"We would, therefore, view this as an opportunity to put cash to work and gain exposure to quality assets that are indiscriminately sold off in the panic," said Tucker.

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