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The effect of changing interest rates on foreign investment The central bank has raised interest rates 4 times so far this year in an effort to counter inflationary pressures from the rands plunge last year After the events of September 11 last year many investors became worried about their investments and elected to withdraw their savings and to rather invest in less riskier markets This and the balance of payments deficit were probably the main the causes of the slide in the rand Exporters who have enjoyed the gains of the tumbling currency have delayed repatriating hard currencies to realize additional gains thus further reducing demand for the rand And in October last year the governments attempts to curb speculation resulted in reduced volumes exposing the rand to greater downward volatility The governments slowness in privatizing assets has also hindered foreign investment Some economists believe that an exchange rate above R9 40 cannot be justified For Dollar-based investors reversal to that rate would reflect nearly a 20 appreciation Currently there is some optimism that interest rates will peak soon before reversing there trend This is fuelled by the rands recent strong performance Investors are now looking for a peak in inflation in about September and are thus buying bonds preemptively with good foreign participation driving the momentum thus enhancing positive market segment Leon Myburgh said that a co-ordinated upswing in global growth had the propensity to increase investor risk appetite which in turn supported emerging markets This implies that local assets which look inexpensive from an offshore investors perspective are all the more attractive South African banks have fared poorly as falling interest rates hurt margins and the declining rand hurt investment activity However investors could see a reversal of sector fortunes this year if the rand is able to stabilize and reclaim a portion of its value as most analysts expect it will
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