The immediate future of the rand is not good as the coronavirus pandemic spreads

The rand was on the back foot on Monday morning (16 March) after president Cyril Ramaphosa announced a raft of unprecedented interventions to curb the spread of Covid-19 in South Africa, including closing schools, closing 35 ports of entry and imposing a travel ban on foreign nationals from countries hardest hit by the coronavirus pandemic.

The measures were the outcome of an emergency cabinet meeting held on Sunday in Pretoria, with the virus declared a national disaster.

The number of positive cases of Covid-19 in the country has risen to 61, an increase of 10 from the figure released earlier in the day by the Department of Health.

“This number is expected to rise in the coming days and weeks. Initially, it was people who had travelled into the country, especially from Italy. It is concerning that we are now dealing with the internal transmission of the virus,” the president said.

The situation, the president said, called for an extraordinary response and no half measures.

To add to the rand’s woes, Bianca Botes, treasury partner at Peregrine Treasury Solutions, noted that the Federal Reserve cut interest rates yet again during the overnight session, sending most markets into a tailspin.

“The rand strengthened briefly to R16.04 as the dollar came under pressure, but widespread investor panic and the risk-off environment quickly saw it weaken back to current levels.”

Botes also pointed out that the latest industrial production and retail sales figures in China have dropped significantly year-on-year in January-February 2020.

“We will also keep an eye on today’s Eurogroup meeting, as most EU countries went into lockdown over the weekend,” she said.

Rand outlook

Bloomberg data showed that emerging-market currencies face further sell-downs of up to 30% if the spreading coronavirus outbreak causes US stocks to slide as much as they did in the global financial crisis.

The dollar may strengthen a further 30% against the Russian ruble and 23% versus the Chilean peso, according to the study that examines moves in developing-nation currencies to significant sell-downs in S&P 500 Index, and scales those to a 50% loss. In contrast, the US currency is likely to gain only 1% against the Chinese yuan.

The analysis shows currencies from countries with current-account deficits and relatively illiquid financial markets are the most vulnerable to dollar strength. These include a number of nations in Latin America, along with South Africa, Indonesia, and India.

Bloomberg’s data showed that the rand has lost 12.6% against the dollar so far in 2020, with the local unit forecast to lose 22.4% against the greenback as a result of the coronavirus outbreak.

The rand traded at the following levels against the major currencies in early trade on Monday (16 March):

  • Dollar/Rand: R16.38  (0.77%)
  • Pound/Rand: R20.22  (1.32%)
  • Euro/Rand: R18.22  (0.93%)

South Africa faces a very close call on interest rates this week, with the global economy in a severe risk-off phase, and the full economic impact of Covid-19 not yet having been felt, said Investec chief economist, Annabel Bishop, in a note.

Globally, the economic consensus now expects global growth to be 0.5% y/y to 1.0% y/y lower this year, than the previously expected figure of closer to 3.0% y/y for 2020.

The IMF previously forecast global growth at 3.3% y/y for 2020, and the World Bank had 2.5% y/y – due to different calculation methods as well as different countries used in their compilations, Bishop said.

The IMF dropped its forecast for global growth by 0.1% y/y in February, but the World Bank is yet to revise its figure. With global growth forecasts continuously being revised down, the head of the IMF, Kristalina Georgieva, recently “predicted that global growth would dip below last year’s rate of 2.9%”.

“We now forecast global growth 0.9% lower than we expected in January,” the economist said.

“For South Africa GDP growth is now likely to come out at 0.1% this year, due to the impact of Covid-19 on global growth and hence on demand for SA exports of goods and services, as well as the negative impact of load shedding which is proving to be more severe than Eskom initially indicated.”

“We expect a 25bp cut at the MPC meeting next week. However, the risk of a Moody’s downgrade at the end of the month could scupper the chance of this rate cut, given that it could push the domestic currency towards R18.00/USD if the current severe risk-off environment in global financial markets persists,” Bishop warned.


Read: Ramaphosa declares a national state of disaster over the coronavirus – here’s what you need to know

 

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The immediate future of the rand is not good as the coronavirus pandemic spreads