Sovereign slips six places in ECR rankings before rand sell-off.
The central bank’s decision to raise interest rates to stem the slide in the rand has had little impact in shoring up negative sentiment surrounding the regional giant.
The financial markets are still troubled by the country’s economic weaknesses, spurred by a combination of domestic policy errors and waning commodity demand as China’s growth slows.
The sovereign’s risks have been rising for more than two years (see chart), with its monetary policy/currency stability sub-factor one of several economic, political and structural risk indicators progressively downgraded by experts.
ECR expert Colen Garrow, chief economist at Meganomics, states: “The problem South Africa is facing again is a run on its currency. The move seen by the South African Reserve Bank today attests to that concern.
“The 50 basis point hike lifted the policy interest rate from the lowest it has been in 40 years, but it is unlikely to either stabilize the rand exchange rate or put a lid on the rate at which prices are growing.”
He adds: “As important as it is to preserve its inflation fighting credentials, the MPC may have unwittingly unlocked a series of interest-rate increases. The cue currency speculators now have is that the rand may be a one-way bet again, since monetary policymakers have shown a willingness to curb increases in prices that they have little-to-no control over.
“Tighter monetary policy is a blunt instrument in cases where wage inflation has been precipitated by prolific strike action in the supply sectors of the economy, where administered prices are increasing, where food inflation is impacted by drought in other parts of the world, and where fuel and electricity prices are rising.”
Garrow concludes: “All these factors are exogenous. As is the influence of the recovery in the US, which is bringing QE to a quicker-than-expected end, and in turn the attraction of high-yielding emerging-market currencies, such as the rand.
Nedbank economist Isaac Matshego, another ECR expert, states: “Our big problem is persistently tepid growth against the backdrop of rapidly rising costs of production. The economy operates below potential – hence the growth rate is well below the potential 3.0% to 3.5%.
“Production disruptions seem to be the main hindrances to firmer growth as was evident in 2012 and 2013. Labour strikes in mining and manufacturing had a negative impact on these export-oriented sectors and this inhibited higher domestic growth, although the weak global environment also contributed.”
He adds: “As a result of weak exports, our current-account deficit has widened, reaching 6.5% in the third quarter of 2013, and this raised our dependence on short-term portfolio capital inflows. A reversal of fortunes as global sentiment shifts, partly in response to Fed tapering, has resulted in portfolio outflows of almost R60 billion in the past three months. This is really what has pressured the rand.
“A China slowdown would hit us via weak global commodity prices. The mining sector is already under a lot of financial pressure, and a further drop in gold and platinum prices in particular would prompt cost cutting, mainly job cuts.”
Matshego concludes: “Labour unions in the mining sector have become more militant, with the AMCU having taken a hard-line stance towards both mining companies and the government, and job cuts would be strenuously resisted.
“Socio-political tensions are already high ahead of the parliamentary elections in April. The shooting of protesters by the police in recent months has worsened the situation.”
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