Rand Could Be 2019’s Lira as Eskom Woes Weigh, StanChart Says

JOHANNESBURG (Capital Markets in Africa) – South Africa’s rand is most at risk of a slide among the high-yielding currencies this year even as a more dovish Federal Reserve and weaker dollar support developing-nation assets, according to Standard Chartered Plc.

Domestic mis-steps and weak fundamentals in emerging-markets could quickly outweigh a supportive global environment, especially during spurts of strength in U.S. markets, Standard Chartered analysts Geoff Kendrick, Razia Khan and Samir Gadio wrote in a note to clients.

“While global pressures for EM should be less in 2019 than 2018, short periods of higher Treasury yields and dollar strength could unearth idiosyncratically weak domestic stories,” the analysts said. “The rand has the potential to be one such story.”

The rand is the worst-performing emerging-market currency in February amid the deepening financial woes for the highly indebted state-owned electricity company Eskom Holdings SOC Ltd. A bailout for Eskom may worsen the government’s fiscal deficit, raising the risk of a debt downgrade to junk by Moody’s Investors Service.

That would put the rand on course to emulate Turkey’s lira, which slumped 28 percent last year amid central-bank policy stumbles and tensions with the U.S.

‘Technically Insolvent’
Finance Minister Tito Mboweni must convince Moody’s in his budget presentation on Wednesday that he has a credible plan to save Eskom, which provides more than 90 percent of the country’s power. The company is “technically insolvent and will cease to exist at current trajectory by April 2019,” according to a report by the Department of Public Enterprise. Moody’s has cited it as the biggest risk to South Africa’s economy.

“Anything less than a credible plan for Eskom risks the rand becoming 2019’s first large EM sell-off,” the Standard Chartered analysts said. Should the budget disappoint, the rand could weaken to 16 per dollar, they said.

The currency was little changed at 14.0819 per dollar by 11:42 a.m. in Johannesburg. It’s down 5.9 percent this month, almost twice as much as Argentina’s peso, the second-worst performer. The rand’s one-month implied volatility against the dollar is the highest among its peers, suggesting traders see it as most at risk of wide price swings.

Source: Bloomberg Business News