Despite the stronger dollar and a number of geopolitical worries, the rand has held up remarkably well.
This points to the fact that investors are recognising that there have been some real improvements in the country, says Dave Mohr, chief investment strategist at Old Mutual.
“South Africa’s current account deficit has halved as a percentage of GDP since. And while the fiscal deficit remains sticky, the most recent budget aims to address it more vigorously and realistically than previous versions,” said Mohr.
“Investors certainly have more faith in President Ramaphosa implementing key reforms than his predecessor.”
He added that South Africa’s dollar-denominated debt levels are not excessive and that the bigger risk is that foreigners hold close to 40% of rand-denominated government debt.
“If they want to reduce emerging market exposure, this could lead to selling and upward pressure on interest rates. But there is no risk of the government not being able to fund itself and turning to the IMF,” he said.
Petrol and inflation
While a positive sentiment continues to surround the country, it is definitely not a great time to be a motorist, said Mohr.
“The record-high inland petrol price of almost R15 per litre looks set to rise by another 70 cents per litre (in June 2018),” he said
“Despite this, inflation is unlikely to increase meaningfully.
“Petrol is only 4.5% of the overall consumer price index, and rising petrol inflation is counteracted by disinflation in other categories. The below chart shows how volatile the rand oil price is and how, despite this, it has a muted impact on inflation.
“Further rate cuts are however off the table in the current environment of geopolitical risk and shifting sentiment towards emerging markets,” he said.
Mohr said that as long as inflation remains ‘relatively well behaved’, the softer rand in the second quarter of 2018 can broadly be seen as a good thing for the local economy, local markets and local investors.
“For the economy, the weaker rand supports exporters, import-competing manufacturers and tourism,” he said.
“Weak first quarter mining and manufacturing production numbers suggest these industries could use a weaker currency. Both mining and manufacturing output contracted in the first quarter, highlighting a gap between the “soft” survey data that show increased confidence and the “hard” activity data that still point to sluggishness.
“For local markets, the weaker rand boosts the offshore earnings JSE-listed companies report locally. Investors therefore tend to benefit from higher local equity prices, but also higher rand values of global assets.”