South Africa is closely intertwined with the global economy, and as an emerging economy, is more vulnerable to international crises than developed countries, which can harness greater resources to mitigate repercussions of these crises – such as the Covid-19 pandemic – than are available to emerging economies.
While the South African rand has been performing well, recording an elevated current account surplus in the second quarter which makes it the top-performing emerging-market currency, there are other factors to consider in determining how it could fluctuate in the months to come.
Bianca Botes, director at Citadel Global, highlights some of the current factors that experts are studying closely to determine the future performance of the rand, in order to mitigate risks for their clients.
1. US Unemployment figures
“As a leading world power, the United States plays a significant role in influencing international economies. Currently, chief among the factors to observe is the decline in the number of Americans filing new claims for unemployment benefits, which points to a gradual improvement in the US economy as business continues to re-open.
“At the same time, the US Federal Reserve is preserving its dovish approach to the dollar for longer than expected, which is further stimulating growth,” said Botes.
2. International debt
The performance of other global players, such as China and the European Union must also be taken into consideration.
Huge aid and economic stimulus packages by many European countries played a pivotal role in limiting the damage caused by the pandemic and levels of employment have been increasing in these countries at rates higher than previously anticipated.
Emerging economies do not have the same resources to harness and are also facing mounting debt burdens, so any increase in interest rates will drain even more of available government resources as they are needed to pay back the debt.
3. Trade relations
“Currently, most investors are more focussed on global factors such as post-pandemic economic recovery and the normalisation of monetary policy globally,” said Botes.
“However, other global geopolitical events which strengthen the dollar could have a negative impact on the rand, such as the trade conflict between the US and China. Trade conflict erodes global risk appetite because of the uncertainty it causes, and a reduced risk appetite always negatively influences riskier currencies, such as the rand.”
4. Local commodities
Botes said that local commodity prices are an important factor to observe.
“Elevated commodity prices boost exports, and South Africa remains strong in this respect, although in the long term, Eskom’s newly stated commitment to transitioning from coal to renewable energy could impact coal mining demand.”
5. Local economic, political, and health factors
While global developments are still front-and-centre in the minds of most investors, local political developments also play a part. The July unrest in KwaZulu-Natal and general political instability as reflected in newsworthy political scandals and factionalism make investors nervous.
The situation has been compounded by severe lockdowns that have wrought considerable economic damage and contributed to unrest.
“If capital is withdrawn from emerging markets, their economies crash, there is no money for investment and, as previously mentioned, they are also saddled with huge debt burdens,” Botes said.
Many finance and treasury experts believe that the recovery of most emerging markets will mostly depend on how authorities mitigate the Covid-19 health crisis, however, Botes does not entirely agree.
“Inoculation rates in Africa have been low because of a lack of vaccines, but I don’t foresee this playing much of a role going forward. Rather, local vaccinations will be important for local economic growth, in particular for the hospitality and tourism industry.
“South Africa’s infection risk standings are not positive, as is indicative of the country still being on the UK’s red list. We also need to take into account the repercussions of potential future waves and lockdowns.”
While the rand traded in a strong position for the first part of September, the recent shift in risk sentiment, coupled with the anticipated tapering by the Fed has left the currency rather flustered. “As we continue monitoring global and local events, and the fluctuations in the rand we remain of the view that South Africa remains well-positioned as an emerging market leader.” Botes said.