Rand note: the domestic currency has strengthened on growing market expectations

04 Dec 2017

Annabel Bishop

Chief Economist

The domestic currency has strengthened on relief SA was not downgraded by Moody's, growing market expectations of a Cyril Ramaphosa ANC election win and the fiscal consolidation newly mooted by National Treasury

Please note the change to the first rand US dollar exchange rate in the first line.

Volatility index for selected emerging market currencies
  • The rand has strengthened to R13.52/USD, R16.03/EUR and R18.14/GBP on growing market expectations of a Cyril Ramphosa ANC election win, with recent relief SA was not downgraded by Moody's and the fiscal consolidation newly mooted by National Treasury. Todays’ positive growth numbers also assisted. Prior to this, October’s MTBPS, which showed projected substantial fiscal deterioration, and the proposal of further expenditure pressures, caused the currency to reach R14.46/USD, R16.96/EUR and R18.98/GBP. 
  • It is unlikely the market has fully priced in the different potential outcomes of December’s ANC elective conference, and there could be volatility in the rand should it disappoint. The market appears to be increasingly pricing in that the current deputy president of the ANC, Cyril Ramaphosa, will become the next president of the ANC.
  • However, there are various possible outcomes (or scenarios) to the ANC elective conference. The up case for the market is perceived to be an ANC election outcome where Cyril Ramaphosa is elected president of the ANC, without any perceived encumbrances, such as a deputy president, or forced allegiance, that would dilute his ability to bring about free market economic reforms for the economy. This would likely likely boost business confidence.
  • The expected case is a compromise outcome, a unity between what the markets would likely favour, i.e. the up case, and what the markets are not perceived to favour (the down case). Such an outcome could consist of Nkosazana Dlamini-Zuma, the current President’s ex-wife, and Cyril Ramaphosa, sharing leadership with either one a president or a deputy president of the ANC, or another individual seen as a unity candidate. 
  • The down case for the markets is likely an election outcome such as Nkosazana Dlamini-Zuma with another individual as president or vice president of the ANC seen as coming out of the current President’s camp. The extreme up and extreme down cases for the economy devolve from the up and down cases, where conditions are seen to either improve, or worsen, further respectively.
Economic Scenarios: the risk is currently tilted to the downside
  • We believe the expected case, outlined above, is more likely for the economy, i.e  a compromise outcome, a unity between what it is perceived that the markets would favour, i.e. the up case, and what the markets are not perceived to favour, which could hamper free market reform in South Africa. 
  • Under the expected case, the economy would likely continue to see weak growth with a significant level of state intervention into, and control of, the economy persisting. Consequently there could be some market disappointment, and so possibly some rand weakness on this election outcome, although the rand’s movements typically depend on a range of factors besides domestic politics.
  • With Moody’s set to review SA’s credit ratings in April 2018 with a view to downgrade South Africa’s local and foreign currency long-term sovereign ratings from investment to sub-investment grade, concern has arisen that the agency might downgrade SA after December’s ANC elective conference if the outcome is seen as unfavourable by the markets. South Africa’s key Moody’s ratings are both on a negative outlook, with a ratings review pending.
  • However, Moody’s has said “(t)he review will allow the rating agency to assess the South African authorities' willingness and ability to respond to these rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities.” The agency will likely not be able to assess these factors after the conference, but rather only after the 2018 Budget as substantial fiscal detail is needed.
  • Should South Africa lose its Moody’s investment grade local and foreign currency long-term sovereign ratings (the expected case) there is expected to be a negative impact on both the rand and bond markets as SA will be forced to exit Citibank’s World Government Bond Index with substantial outflows from South Africa’s debt market, weakening the rand in that period. 
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