JPMorgan expects South Africa\u2019s economic growth to remain anemic against a global backdrop of rising rates and a stronger dollar.<\/p>\n
That could lead to fiscal challenges and a credit-rating downgrade by Moody\u2019s, which would see the country\u2019s local-currency bonds exit indexes of investment-rated debt, triggering forced selling of as much as $7 billion, according to Citigroup Inc.<\/p>\n
\u201cSouth Africa enters 2019 with large vulnerabilities,\u201d JPMorgan analysts Saad Siddiqui, Anezka Christovova, Milo Gunasinghe and Jonny Goulden said in a report. \u201c<\/p>\n
Its ability to run a wide current-account deficit will be tested in an environment of tighter external funding conditions. Low carry compensation for fundamental weaknesses underscores our structurally bearish view on the rand.\u201d<\/p>\n
As the rand weakens and inflation accelerates, the South African Reserve Bank may be forced to raise its policy rate by as much as 75 basis points to 7.50%, further retarding any economic recovery, they said.<\/p>\n
Investors will also be wary of populist policy moves by the ruling African National Congress as the election approaches, with \u201cheadline noise\u201d increasing rand volatility.<\/p>\n
The Bull Case<\/strong><\/p>\n A constructive view on the rand is supported by an orthodox central bank, strong and convincing disinflation, ongoing improvements in South Africa\u2019s external balances, government measures to curb corruption and an overhaul of indebted state-owned companies, said Henrik Gullberg, a London-based strategist at Nomura.<\/p>\n As the US economy slows and inflation expectations moderate, the Fed would be inclined to soften its policy stance, Gullberg said.<\/p>\n As South Africa depends on portfolio flows to finance its current-account deficit, that would benefit the rand.<\/p>\n \u201cNeedless to say, the US inflation and policy outlook remains key for the rand, given its high external beta,\u201d he said.<\/p>\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2018\/12\/Rand1.png\")
<\/a><\/p>\n