Yet another Round of Bad News for the Rand
Over the last week, the rand has continued to weaken. There are several factors at play here including the unexpected stories concerning Jacob Zuma’s plan to offer free education and the news that Eskom appears to have run out of cash. In our October blog post, we noted that the technical trend and the economic trajectory pointed to further weakness – so the moves we have seen over the past few days were not entirely unexpected.
There are countless stories that add to the overall narrative driving the currency at present. These now include three new stories:
- Zuma’s plan to spend $40 billion on free education,
- Eskom’s cashflows and
- The unfolding events in Zimbabwe.
Less than a month after Finance Minister Malusi Gigaba announced that state revenues were $50 billion below budget, Jacob Zuma has announced a new plan for free education. It’s commonly accepted that free tertiary education is simply not affordable at this stage. Zuma’s plan, which appears to be an expensive means of buying support, will put further strain on the fiscus.
The currency weakened further when news broke that the Treasury’s long-time budget head, Michael Sachs, has resigned. It has been reported that he quit over interference from the presidency and over the proposed education funding plans.
It is now emerging that Eskom is running out of cash. After the recent bailout of SAA, government will struggle to find cash for a bailout of Eskom. Since the entire economy is dependent on Eskom being operational, the money will have to be found. But, this will add even more pressure to the budget.
It appears that a military coup has taken place in Zimbabwe. While this is probably a positive development in the longer term it also increases uncertainty in the region. Depending how it plays out it could destabilise the entire region, or have very little impact. For now, if the military can maintain control the impact may be muted.
Other factors driving the rands fluctuations:
Further downgrades are regarded as highly likely and are probably now priced into the currency. If local currency debt is downgraded, certain large global bond funds will be forced to sell SA bonds. However, there is significant global demand for high yield debt (ie. junk bonds). So, while the knee jerk reaction to downgrades would probably be further rand weakness, the medium term effect may be quite small.
December’s ANC Elective Conference
Nkosazana Dlamini-Zuma is still believed to be the front runner, though it’s a very tight race between her and Cyril Ramaphosa. It’s also widely believed that if she is unlikely to win, the conference will be postponed. There is also the option of a compromise candidate like Zweli Mkhize being agreed to before the conference.
So, there are four, or possibly more, outcomes, neither of which is anything close to a certainty. Sporting Bet have the current odds, though it’s difficult to know how representative that market is.
The following are the possible effects each outcome may have on the rand:
A victory for Nkosazana Dlamini-Zuma – although this would be negative for the rand in the long term it may bring some stability in the short term
A victory for Cyril Ramaphosa – likely positive in the short term, but may lead to further turmoil later
A compromise candidate such as Zweli Mkhize is chosen through a process of consultation – the effect on the currency would be increased uncertainty until his objectives are established.
Conference postponed – this may be the worst outcome for the rand as it would show that the ANC is so divided that it has become dysfunctional.
All of the above factors are potentially negative for the rand. However, there was one positive development. This week’s government bond auction was three times oversubscribed. This underscores the global demand for high yield/junk debt. While global interest rates remain low, South Africa may be able to continue to borrow more. The debt-to-GDP ratio has doubled under Jacob Zuma, but it’s still quite low relative to many other countries. However, this is a very dangerous situation for SA to be in – if global rates move higher, investors will become more selective and SA bonds will be the first to come under pressure.
The euro, pound and dollar
While these currencies have their own dynamics driving them, the narratives driving the rand will determine how it trades against them. The rand is in a well-established trend pointing to further weakness. It is oversold and may correct in the next few weeks – but taking a bullish view on the currency amounts to betting against the trend and the economic trajectory. We had a similar outlook in in October, and that view remains unchanged.
Contact us to discuss your FX needs in these volatile times – we can not only hedge your future currency needs (a great way to protect against rand fluctuations) and work market orders that allow you to choose a rate to optimise your currency dealing, but a Mercury FX account gives you access to open accounts in the UK and/or Hong Kong through which you can trade or hold your money in over 40 currencies.
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