The rand is in trouble

·17 Sep 2015

The rand and other emerging-market currencies could still weaken if the US Federal Reserve raises interest rates‚ even if such a move has been expected for some time‚ Moody’s said.

The US rates decision will be announced at 8pm local time.

“When it occurs‚ a Fed move will contribute to downside risks for some emerging market sovereigns‚ particularly those that are more reliant on foreign investors to meet their operating and capital financing needs‚” Moody’s said.

South Africa is one of these emerging markets because it relies heavily on foreign investments to finance its current account and budget deficits.

An interest rate increase in the US will make assets there more attractive to investors‚ who may remove some of their investments from emerging markets and invest in the US‚ causing the dollar to strengthen. A firmer dollar would lead to a weakening in the currencies of emerging markets.

Although lower global commodity prices and possible volatility in capital flows would pose challenges to some emerging markets‚ a combination of reserve buffers and policy vigilance had the capacity to limit the negative sovereign credit impact‚ Moody’s said.

It identified the most affected emerging markets‚ and those most at risk going forward‚ as Brazil‚ Russia‚ Turkey “and to some extent SA” in which severe domestic challenges had contributed to exchange rate and financial market instability‚ and where “policy room to buffer external shocks and protect growth is less robust”.

The rating agency said‚ however‚ that a rise in the short-term interest rate by the Fed would reinforce views that the US economy was on track for above-trend growth. – BDlive