Time is running out for the rand – and South Africa: Sygnia CEO
Despite increasingly tumultuous times for South Africa socially, economically and politically, the country’s currency and appeal to investors has remained fairly resilient – but the time for coasting on good will is running out, says Sygnia CEO, Magda Wierzycka.
With the firing of finance minister Pravin Gordhan, and two subsequent rating downgrades to junk status as a result, South Africa’s economy has certainly taken a knock, but not anywhere near the levels seen during the infamous “NeneGate” of December 2015.
Economists and analyst have expressed some surprise at this resilience, offering varied reasons for why the rand simply didn’t crumble as expected. These range from the junk status already being factored into the market for a long time before the event, to opinions that the international investment market didn’t quite understand local politics.
International events have also played a hand, thanks in main to president Donald Trumps’ antics, and Brexit in Europe.
On Monday, the rand made a half percent gain against the dollar to R13.15, with local factors playing a minor role economists said, giving credit instead, to political movements in Washington.
“Hot money”
In a recent column, Sygnia chief executive Magda Wierzycka echoed this view that the rand’s resilience has less to do with local factors, and more to do with the United States’ own problems with its president, Donald Trump.
“The dismissal of Pravin Gordhan, perversely, came at the worst possible moment for South Africa,” Wierzycka said.
“Simultaneously and independently, international investors became disillusioned with the promises of growth punted by US President Donald Trump and lowered their expectations of the pace at which interest rates will increase in the US.
“Consequently, and fairly indiscriminately, they have redirected their investments to emerging markets which offer high interest rates on their investments.”
According to Wierzycka, this unexpected and short-term bonanza is known as “hot money”, and has propped up the rand and buffered it from the “true economic cost of what has been done”.
It is also temporary, she said, as it is driven by “indiscriminate investment by foreigners into emerging markets”, where the motivation is simply the high interest rates they will earn.
In South Africa’s case, the same “high interest rates” paid by government is money taken away from education, welfare, infrastructure and other basic services.
But this cannot last forever, she warned.
Time is running out
Wierzycka said that these investment flows will ultimately reverse on either some domestic political news – or even on news like Donald Trump lowering US taxes or reducing the level of regulation, or the US Federal Reserve increasing interest rates.
“(After that) the rand will fall to R16.00 to the US dollar or below unless we reverse the course of history,” the CEO said.
The Sygnia chief said that the country was at a tipping point, and that there was no room for complacency.
Other analysts have pointed out that South Africa’s political landscape leading up the ANC’s elective conference in December will direct much of the sentiment in the market, locally.
Investment and analysis group, Nomura, holds that with a base-line view that the status quo is held – that is, an outcome favourable to president Jacob Zuma and his allies – South Africa’s markets are heading to the same R16 to the dollar levels mentioned by Wierzycka.
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