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Rand’s undeserved rally gives SA some breathing space

Hopes of a trade truce between China and the US and a more dovish Federal Reserve are giving South Africa’s rand a boost — and President Cyril Ramaphosa some breathing space as he struggles to stabilize the state-owned electricity company while curbing government debt levels.
Given the outlook for South Africa’s economy — sluggish growth, a widening fiscal deficit, and the threat of a credit-rating downgrade to junk — the rand shouldn’t be a popular investment. To be sure, it’s on track for its worst February in more than a decade, with a 4.4% loss against the dollar. But it’s still up for the year, and one of the top five performers among emerging-market currencies tracked by Bloomberg.
The rand’s carry appeal, a rally in commodities and the progress in trade talks have drowned out the noise around South Africa’s political and fiscal risks, according to ING Groep NV. The currency slipped 0.3% to 13.86 per dollar by 3:16 pm in Johannesburg, paring its advance this year to 4.5%.

“Implied yields on the rand are high as external conditions have become more benign and emerging-market implied volatility has fallen back to levels seen last May,” said Chris Turner, the London-based global head of foreign-exchange strategy at ING. “Investors have been happy to allocate more to carry-trade strategies, including investments in the rand.”
The improving backdrop couldn’t have come at a better time for Ramaphosa and his finance minister Tito Mboweni, who are battling to stave off a credit downgrade to junk that would increase the cost of borrowing, further stretching state finances. A stronger rand helps keep a lid on inflation, giving policy makers room to hold borrowing costs steady ahead of general elections in May.
Moody’s Investors Service, the only major rating company still to rank South Africa at investment grade, will assess the sovereign on March 29 following an annual budget that busted the government’s self-imposed spending ceiling.
Government debt is forecast to exceed 60% of gross domestic product for the first time on record in 2023, partly because of a R69 billion($5 billion) bailout for Eskom, the power utility that’s wallowing in debt and struggling to keep the lights on.
South Africa already trades as junk in the derivatives market. The cost of insuring the country’s debt against default in five years is higher than that of Brazil, which has a non-investment rating from Moody’s.
A downgrade from Moody’s would see government bonds exit investment-grade indexes, sparking forced sales of as much as $10 billion, according to Investec Bank.

However, if global markets remain in a neutral or risk-on environment, the rand would probably hold its own or even strengthen, said Annabel Bishop, the Johannesburg-based chief economist at Investec. The rand’s implied carry, adjusted for volatility, has been climbing since November, and a gauge of emerging-market carry returns is up 9% from a September low.
The reprieve may be temporary, according to Nedbank. As central banks from Europe to the US run out of ammunition to stimulate growth, the dollar rally will resume and emerging-market currencies will weaken, Neels Heyneke and Mehul Daya, Johannesburg-based strategists at Nedbank, said in a client note. When that happens, South Africa’s weak fundamentals will come into play.
“As long as the EM currencies remain in this bull trend, the rand is unlikely to break higher, notwithstanding fiscal pressures revealed in the budget,” Heyneke and Daya wrote. “Global forces will likely trigger the next round of rand weakness. Fiscal problems would then fuel the unwinding of the rand carry trade.”

Article credit https://www.moneyweb.co.za/news-fast-news/rands-undeserved-rally-gives-sa-some-breathing-space/

By | 2019-02-27T13:22:23+00:00 February 27th, 2019|LATEST NEWS|Comments Off on Rand’s undeserved rally gives SA some breathing space

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