The Swazi Observer

Effect of US elections on African business
By Fanele Chester
“It’s the economy, stupid!” These immortal words, uttered by campaign strategist James Carville, defined and won Bill Clinton the US presidential race against incumbent George H.W. Bush in 1992. They perfectly capture what the recent campaign was about, which saw the re-election of President Obama into office. In fact, these words define a fundamental truth about the United States: you cannot divorce anything the US does from its economy and financial markets, especially in national politics. This is the price for being the most powerful country on earth. Therefore, foremost on the minds of business leaders in Africa and around the world is the effect of the US’s re-election of President Obama into office would have on the global and African economy. That is to say, drawing from the president’s experience in the past four years and looking at the policies his administration has historically favoured, what is the likely fiscal trajectory for the next four years, and concomitantly what will be the Federal Reserve Bank’s monetary policy? US Fiscal Cliff Worries Worries about a US fiscal cliff and a global slowdown have put a damper on the highly integrated capital markets around the world in the weeks leading up to election day. This fiscal cliff is expected to be a result of a combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective on December 31, 2012 under the Obama administration, which had been delayed by the US Congress until after the elections as outlined by the Budget Control Act of 2011. To be fair, the uncertainty that comes with election seasons is historically negatively correlated with business activity as individual investors and large corporations hold on to their cash and assets until business growth forecasts can be made based on the new leader’s possible fiscal policies. Those travelling outside Swaziland or buying foreign currency will know that the South African Rand has fallen 6.6% this US election year and has performed outside its average range of R8 - R8.50 to the dollar (see Fig. 1). A month before November 6, it continued to trade within an even tight range pending results from the election. However, in the week right before the election, the rand and other emerging markets currencies improved against the dollar, euro and pound. This boost is very important specifically for African businesses because it is an important reflection of how the global economy will behave and what this means for our economies, during Obama’s tenure, all other things (such as sovereign or political risk) held constant. After President Obama won the vote of the American people, African bourses reacted positively to the news. The South African Rand gained 0.5% against the dollar to trade at R8.67/$ by closing on Tuesday. Going Forward: US Monetary Policy and the Global Economy In terms of policy, Obama’s re-election is a signal that interest rates in the US will remain ultra low, a fact that is well received amongst African economies. Ben Bernanke, who has kept interest rates at historical lows, will remain chairman of the US Federal Reserve Bank and will likely follow a liberal monetary policy. In 2012, this combination of low interest rates in the US and high GDP growth in Africa has resulted in investment capital being drawn into the continent. Morningstar, a Chicago-based investment research firm reported that mutual funds (pool of funds collected from many investors and invested in securities such as company stocks) focusing on bonds from developed countries outside the U.S. have returned 7% so far this year. In addition, Larry Seruma CEO Nile Capital Management, a New York based, Africa-focused fund noted that “massive monetary measures such as QE3 have the impact of forcing investors out of their comfort zone and into riskier assets” in emerging markets such as Africa. This QE3 is referring to ‘third quarter quantitative easing’ where the US Federal Reserve Bank will buy treasury bonds, forcing interest rates to remain low. This close relationship of the US elections to its financial markets and its influence in the behaviour of companies, highlights that it’s still about the economy. It is true that people vote based on the values and principles of candidates, however in the it is not surprising that citizens US vote with their pocketbooks. Whilst attending Nobel Laureate in economics Milton Friedman’s centennial birthday celebration at the University of Chicago Booth School of Business, this observation was driven home. Monetary policy changes the behaviour of companies. This is the reason why the Chicago School of Economics has supported conservative monetary policy where the Federal Reserve is not given too much discretion, such as QE3 and instead let the markets define it. The problem with this view is that the markets are not perfect, and where they fail, events such as the 2008 recession occur. Further when markets fail, it is not only the economy of the US that is affected, but also the global economy. By extension, it is not only unemployment and public policy in the US that is affected, but also global unemployment and public policy too. Thanks to the increasing economic integration and to the US’ central role in it, African businesses are not insulated from US elections. Fortunately, four more years under Obama promise to yield good returns for our economies.

14 November, 2012 12:12:00

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