Yuan�s SDR admission to nudge Pula downwards
Brian Benza | Friday December 4, 2015 11:02
At an executive board meeting in Washington D.C. on Monday, the IMF determined the Yuan to be now a freely usable currency and will, effective October 2016, be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese Yen and the British Pound. Under the crawling peg exchange rate regime, the Bank of Botswana (BoB) manages the Pula’s value in a “basket of currencies” assigning weights to each currency. The basket of currencies comprises the South African Rand (ZAR), which has a 50 percent weight with the remainder assigned to the SDR.
Research manager at First National Bank of Botswana, Moatlhodi Sebabole, believes the Pula, which has been weakening against the SDR currencies and gaining against the Rand in the recent past, will feel the pressure of the Yuan’s admission into the SDR basket.
“Inclusion of the Yuan will likely pressure the Pula downward. “This is primarily because the People’s Bank of China will remain accommodative through to 2016 and thus maintain a relatively weak Yuan. By virtue of Pula tracking Yuan, we will likely see some downward pressure on Pula which will be some form of Pula weakness,’ he says.
From being almost at par five years ago, the Pula has been weakening against the Chinese currency to P1.62 per Yuan as at end of November 2015. This has translated into imports from China becoming more expensive along with others from SDR countries.
However, Sebabole says the BoB will have to effect some adjustments into the weights of the currencies in the Pula basket and this will determine the extent of the impact on the Pula’s value.
“There will have to be an adjustment of the weightings in the Pula’s currency basket. They will likely either reduce the exposure to the rand, which is 50 percent weighted; or leave the weightings unchanged and shift within the SDR itself. What is likely is that Yuan will get weightings close to the yen in the SDR,” he says.
Former BoB Deputy governor, Keith Jefferis says the effect on the Pula will largely depend on the weight the Chinese currency is assigned. “I doubt the inclusion will have much impact, although it depends a bit on how much weight it has. The Great Britain Pound (GBP) is in the SDR but with a small weight and has little influence. The US Dollar will remain the largest component of the SDR. And furthermore, the Yuan is partially tied to the dollar anyway so the Yuan exchange rate will not have much impact on the SDR exchange rate,” he says. Like any other emerging market currencies, the Pula has weakened against the developed market currencies, notably the dollar.
According to the latest statistics from the BoB, in 12 months to November 2015, the Pula has depreciated against the euro (0.3 percent), pound (11.4 percent), yen (12.0 percent) and the dollar (15.3 percent) but appreciated against the rand (10.7 percent).
Due to its relation to the Rand at 50 percent weight, the exchange rate between the local currency and US Dollar closely tracks the Pula/Rand exchange and given the 52-week volatile lows on the South African currency, the Pula has been a causality due to its relation with the Rand.
“The weakness to the Yuan has closely tracked the weakness of the ZAR to that currency as well - as such it is a causality effect on Pula,” added Sebabole. In an effort to reduce the influence of the volatile Rand on the local currency, the central bank last year reduced the weight of the South African currency in the basket to 50 percent from 55 percent while the rate of the crawl has been adjusted from minus 0.16 to zero
In terms of trade, Sebabole says the inclusion of Yuan in the IMF’s SDR will see more stability in the control of the currency and less likely that there will be too much control on the Yuan which will benefit trade facilities with China.
On the global scale, the IMF says the inclusion of the Yuan will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies.