Investor confidence over the South African economy was dealt a heavy blow on Tuesday following the abysmal announcement that economic growth contracted by 1.4 percent in the last quarter of 2019. Photo: Chris Ratcliffe/Bloomberg
Investor confidence over the South African economy was dealt a heavy blow on Tuesday following the abysmal announcement that economic growth contracted by 1.4 percent in the last quarter of 2019. Photo: Chris Ratcliffe/Bloomberg

SA investor confidence dealt heavy blow by abysmal economic growth figures

By Lukman Otunuga Time of article published Mar 3, 2020

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COMMENT – Investor confidence over the South African economy was dealt a heavy blow on Tuesday following the abysmal announcement that economic growth contracted by 1.4 percent in the last quarter of 2019.

Unstable domestic conditions inspired by power cuts weighed heavily on output and business confidence while the unfavourable global macroeconomic landscape exposed the country to downside risks.

With economic growth falling for two consecutive quarters, South Africa has officially entered a technical recession which certainly does not bode well for the rand and local stocks.

The reality from this economic announcement is that the South African Reserve Bank (SARB) may be forced to cut interest rates from 6.25 percent in an effort jumpstart economic growth in 2020. However, these efforts are likely to be complicated by the fact that annual inflation has jumped to 4.5 percent, its highest level since June 2019.

The road ahead for rand will be filled with many obstacles as investors question whether Moody will leave or downgrade South Africa’s last credit rating on March 27.

In regards to the technical picture, the rand has depreciated against every single currency today and shed almost 1 percent against the dollar. Falling confidence over the economy in the face of domestic and external risks may weaken the local currency with R15.80 acting as the first level of interest.

Nevertheless, there is still some hope for the rand if expectations jump over the SARB cutting interest rates during the first half of 2020 to rekindle economic growth.

Lukman Otunuga is a senior research analyst at FXTM.

BUSINESS REPORT

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