Risk-off environment exposes SA’s weak fundamentals

20 August 2019

The global risk-off environment, brought about by fears of a US recession, has further exacerbated South Africa’s economic woes. “When the tide goes out, you tend to see which countries are exposed in terms of weak fundamentals,” says Annabel Bishop, Investec Chief Economist.

Global events rocking the rand

In this Investec Focus radio podcast, Investec Chief Economist Annabel Bishop discusses local and international concerns affecting the South African economy.

Annabel Bishop on rand volatility

“Typically, you do see quite a bit of volatility in the domestic currency in the middle two quarters of the year. In the northern hemisphere summer period, we tend to see heightened sensitivity to global market events.
 
“So if you have a risk-off event like the recent escalation of trade war tensions between China and the United States and concerns that the FOMC might not cut interest rates as much as previously was expected - those concerns were exacerbated in terms of the market impact and that’s quite typical for this time of the year. This given that trading conditions are fairly thin as the bulk of market traders in the northern hemisphere do tend to go away on their summer vacations now.”

 

Read Annabel’s Rand Note.

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On underlying fundamentals for SA currency and markets remaining weak

“When the tide goes out, you tend to see which countries are really exposed in terms of weak fundamentals and of course with the global financial markets seeing a risk- off period, essentially the tide flowing out, then you see some of South Africa’s worries really being exposed, particularly in the run up to the medium term budget policy statement.

"That mini budget we get, halfway through the fiscal year, gives us an update on government finances and of course the great worry around Eskom and its financing - what’s the quantum of debt that’s going to likely be transferred to the South African government balance sheet?”

On the proposed Debt Relief Law

“The worry [with the new Debt Relief bill] for the banking system is that such write-offs can have significant impact on the banks’ books themselves. Conversely, this comes at a time where debt forgiveness could see some increase in borrowing.”

On an IMF bailout

“The IMF has said that South Africa is not, at the moment, in a situation which would require IMF rescue, which only happens when you go into a balance of payments crisis, so if we were unable to make payments on our government debt, particularly hard currency and foreign payments. South Africa is not deemed to be in that territory at the moment.”

On Brexit’s impact on SA

“There’s been a lot of increased relationships  with South Africa in terms of trade. The UK is looking to foster deeper trade relationships and business ties with SA. If we do see a hard Brexit, strong breakaway from the EU for the UK, it will look to foster trade relationships and deals with other countries.”
 

An interest rate cut from the FOMC?

“We have seen concern that the United States might not cut interest rates by as much as needed in the face of what could be a weakening in US economic growth and global economic slowdown.

“If we do see a situation where it looks like the United States will really go into a recession then I don’t think the Fed  would hesitate in terms of cutting interest rates. But at the moment the US economy is deemed to be doing fairly well and I think there’s a friction between what the markets expect and what’s been communicated by the FOMC.”

“Markets are pricing in an 80% chance of a cut in the next meeting which is in September and slightly less than that for October and  then perhaps around about 50% in terms of the December cut. Although these probabilities do change quite a bit.”

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