Nowhere to Hide for South Africa’s Rand as Trade Tensions Ease

JOHANNESBURG (Capital Markets in Africa) – The ink drying on the phase-one U.S.-China trade deal may be good for emerging-markets generally — but it bodes ill for the rand as investors return their gaze to South Africa’s domestic challenges.

The South African currency has slumped 3.6% versus the dollar this year, the worst performance among emerging-market peers after Brazil’s real, even as easing trade tensions and an improving global economy fuel demand for riskier assets. A gauge of major developing-nation currencies is unchanged in the period, while stocks are up 1.9%.

The rand’s weakness may become more pronounced ahead of key domestic events, according to Guillaume Tresca, a senior emerging-market strategist at Paris-based Credit Agricole SA. Two loom large: Finance Minister Tito Mboweni’s February budget statement and a review of the country’s credit ratings by Moody’s Investors Service.

“Local factors are turning unsupportive,” Tresca said. “It would be hard for investors to take long rand positions ahead of these events.”

Mboweni is scheduled to present the budget statement on Feb. 26. The minister will have to address key issues such as the bloated public-sector wage bill and plans to deal with state-owned companies including Eskom Holdings SOC Ltd.and South African Airways, which are sucking the fiscus dry through repeated bailouts. With the economy teetering on the brink of a recession and tax revenue below target, Mboweni will have to convince rating companies that he has spending and debt levels under control.

The median forecast of analysts in a Bloomberg survey is for the rand to weaken about 2% to 14.80 per dollar by the end of March, from around 14.53 as of 7:03 a.m. in Johannesburg on Tuesday. The most bearish forecast is from ING Financial Markets, which sees the rand at 15.50. Bloomberg calculations based on options pricing predict a 37% chance of the rand reaching that level this quarter.

Moody’s rates South Africa’s local-currency debt at Baa3, the lowest investment level. The rating company’s negative outlook means there is a substantial chance of a downgrade. A move to junk would trigger as much as $11 billion of outflows, according to Credit Agricole. Approximately 15% of rand bonds are currently held by foreigners.

The currency’s three-month implied volatility is the highest in emerging-markets at 13.7%, suggesting that traders are bracing for large price swings in the first quarter of the year. That compares with 10.3% for Turkey’s lira and 9.8% for Brazil’s real.

“There is a rising risk of further rand weakness in the first quarter,” said Annabel Bishop, the Johannesburg-based chief economist at Investec Bank Ltd. “The outlook for the global economy has improved, but that of South Africa has deteriorated.”

Investors are getting concerned about the government’s failure to implement economic reforms and restructure state-owned companies. President Cyril Ramaphosa is facing opposition from within the ruling African National Congress, limiting his ability to move forward with reforms to boost an economy that expanded just 0.4% in 2019, according to the central bank’s estimate.

“I have exhausted my patience with government tinkering,” said Cristian Maggio, head of emerging markets at TD Securities in London. “Ramaphosa was welcomed to the government by the market on the expectation he would do something. He has done close to nothing in almost two years.”

The cost of hedging against further declines is climbing, with the premium of contracts to sell the currency over those to buy it over the next three months, known as the 25 Delta risk reversal, widening to the most since October.

“Doing nothing is not the same as improving slowly,” said Maggio. “Bad situations will fester and the macroeconomic picture of South Africa will get much worse.”

Source: Bloomberg Business News