There is potential for further rand weakness owing to the lack of foreign portfolio flows into South Africa. It will be interesting to note whether the drying up of these flows is a knee-jerk effect after the ratings downgrade or whether this will be the way forward.
Should this be the new norm, we can expect the rand to trade higher in the upcoming weeks and months. One thing to watch is the contagion effect that a potential drying up of portfolio inflows can have, which will start with a weaker rand, which will lead to higher inflation, which will necessitate higher interest rates. The weakness of the currency can be exacerbated by a bigger current account deficit.
Read also: Rand in biggest slide since 2015
The glimmer of hope is the fact that the rand didn’t plummet to post Nene-gate levels after the shenanigans of the past few weeks, which suggests that foreign investors bought bonds with the knowledge that South Africa might be downgraded and, when it happened, didn’t run to the hills.
Will higher yield be our diamond in the rough and at what point does the risk of South Africa make mining the diamond not worth it?
Internationally, the US dollar is on the front foot after the US-led missile attack on Syria and people running to safe havens. This has effected emerging markets (EMs) as a run to safe havens is normally inclusive of a retraction out of EMs.
This seems to be the theme at the moment: stronger US dollar, weaker EMs and political risks abound in South Africa.