The rand: Too much to handle
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JOHANNESBURG - Domestic and global geo-political events of the last two weeks were just too much for the Rand exchange rate to handle.
The currency had depreciated against the $US from R13.87/$ on Wednesday 24 July to $14.70/$ this morning. Foreign investment sentiment towards South Africa had remained strong up to the former date. The R186 government bond had traded at one stage at levels lower than 8.0%, the lowest level over the last four year, while share on the JSE recorded positive movements as the JSE once again had traded above the 58 300 level. Then disaster stroked.
The ongoing clash between Minister Pravin Gordon and the Public Protector Busisiwe Mkhwebane’s on various issues like the SA Revenue Service’s “rogue” unit and the transfer of SARS officials to the Finance Ministry had set the tone. The Public Protector is in crossfire between a seemly divided ANC and other political parties over Presidents Ramaphosa’s funding of his election campaign, and the controversial Free State Vrede Dairy Project. The saga around secret meetings between Mr. Dereck Hanekom and the EFF to remove former President Zuma also did not help to improve domestic and international investment sentiment. The announcement by the Minister of Finance Tito Mboweni that the Government will provide another R26 billion to help Eskom survives had serious negative effects on the Rand and financial markets. Moody’s had put South Africa on notice last Thursday that they intend to downgrade the country’s sovereign debt to junk given the further bail out of the power utility.
In reaction to this first week of disaster up to last week Friday foreign investors started to sell South African equities and bonds. The R186 Government security had increased from levels close to 8.0% two weeks ago to almost 8.40% last Friday. The Rand Exchange rate in reaction had lost 42 cents against the $US from a level of R13.87/$ to R14.28/$ last Friday evening. On the JSE the ALSI had lost 677 points or 1.20% during that week
Then further disaster stroke
The announcement last week of the ever growing strong increase in South Africa’s unemployment rate to 29% (the narrow definition that now anyway believes) was bad news for the Rand.
This was followed up on Wednesday by the hawkish announcement by the Federal Reserve that the lower than expected cut of 25 basis points can almost be seen as a once off and that future cuts seem to be off the cards. If this was not enough the rather unexpected announcement by US president Trump last night, that a 10% import tariff will be imposed on 300 billion dollar worth of imports from China - which are currently not subject to import tariffs – on September 1 was just to much for the Rand and equities on the JSE.
The currency lost another 42 cents since the beginning of the week to trade around R14.70/$ this morning. Foreign selling of bonds and equities had contributed much to the JSE already losing around 2 000 points since Monday and at one stage this morning had traded at levels lower than 56 000.
Maybe this is a last wake up call for politicians and policymakers in South Africa to really do something against levels of crime, corruption and service delivery. A downgrade by Moody’s looms over a few months. Will that me the last straw that will break the camels (exchange rate) back.
Dr Chris Harmse: Economist and Chief Investment officer at Rebalance Fund Managers.