The weekend slide in the rand has caused many to panic, with some analysts attributing it to South African failures, presidential inefficiencies and other local elements. The truth, however, is far more complex.
This is according to Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions who said that the first key element to note is that this decline is not confined to South Africa.
“Emerging markets as a whole have suffered severe blows due to the sell-off of riskier assets by investors, and there are many factors contributing to this sell-off,” she said.
Below she outlined six of the biggest reasons for the rand’s decline.
Global trade war
The trade war has played a key role in the global economic dynamic and the effect we have witnessed on emerging markets.
Initially starting as a spat between China and the US, this is now a full blown trade war filled with retaliation in terms of tariffs from countries across the globe.
Turkey – a key player in the emerging market sector – is the latest target with US President Donald Trump doubling tariffs on Turkish steel and aluminium imports.
“Import tariffs and protectionist policies eliminate free trading environments and cause uncertainty sending investors scurrying to safe havens. But there is more to it than just the restriction on trade,” Botes said.
“On Friday, Turkey experienced what could be classified as a currency bloodbath as the lira plummeted by over 18% bringing its 2018 losses close to 40%. Turkey is now accusing countries – the US being the most obvious subject of discussion – of engaging in economic warfare on the country following a failed coup in 2016.
“The Turkish picture is dire, with inflation close to 14% coupled with severe currency devaluations, there is little to appease investors as they rapidly exit the market.”
The Turkey effect
While emerging markets all operate individually, they remain interconnected by classification, a sell-off in one emerging market spills over into other emerging market countries that offer liquidity, such as South Africa.
“So it’s au revoir to emerging market currencies as this sell-off dumps currency back into the market, diminishing its demand and therefore the price,” said Botes.
Foreign interest rate hikes
We all owe something to someone, whether it’s a lunch or a thank you note, and it is no different in the market environment. Unfortunately in the financial markets this debt is expressed in billions of dollars, and an IOU simply won’t suffice, Botes said.
Looking at debt levels – Turkey owes around 70% of its GDP in dollar and euro-denominated debt, South Africa owes around 40% and Russia some 30%.
“One can quickly grasp the impact of rising foreign interest rates, especially in the US and Europe,” said Botes.
“As these two regions move away from the quantitative easing state prevailing since the Global Financial Crisis and raise interest rates, foreign denominated loans become harder and harder to service, especially by economies under pressure,” she said.
Poor economic recovery
While the global economy has been able to shake off the economic turmoil and recover reasonably well from the economic crises, emerging markets have been lagging behind on the journey to stability: Turkey, South Africa and Brazil have all been victims of slow economic growth, rising government debt and poverty.
China slows production
A slowdown in manufacturing in China – a result of the trade wars and China’s move from a being producing economy to a consuming economy – has impacted on emerging markets that rely on trade between the two economies.
As China consumes over 50% of the world’s hard commodities, one can see how a commodity driven country such as South Africa can feel the pinch when this number starts to decline.
“Over the past two years a slowdown in economic growth in China, coupled with a deceleration in production gradually, inexorably cuts off the oxygen to commodity-driven markets,” Botes said.
“Without a back-up plan in place, the resource producers are left stranded.”
Being part of a system
“While local dynamics certainly impacts on the rand, it is important to understand the global backdrop and see the market for what it is: interconnected. What one country decides, creates ripples to the next and so the global market dynamic continues,” said Botes.
“Emerging markets – being the riskier element – unfortunately bear the brunt as investors seek to protect their investments.
“As an emerging market currency and being in a highly liquid and efficient market, the rand is unfortunately bundled with the rest of the emerging market grouping. So while the rand slipped over 4%, it is important to view this in relation to our peers.
“Luckily investors are also risk seekers and eventually, once the storm has passed, they will once again yearn for the yield of an emerging market, as long as the associated risk is aligned with the reward,” she said.
At 7:20 on Monday morning (13 August), the rand was trading at:
- R14.58 to the dollar
- R18.61 to the pound
- R16.60 to the euro