File image: IOL
File image: IOL

This is why coronavirus is hammering the rand

By Bianca Botes Time of article published Mar 13, 2020

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JOHANNESBURG -  The local unit remains in treacherous terrain amidst the current coronavirus market panic, trading at a three-year low against all major currencies. 

A bias towards weakness means that the rand is now largely expected to remain above the R16.00/$ mark for the foreseeable future.

But what are the factors underlying this weakness, and why is the coronavirus taking such a particularly acute toll on the health of South Africa’s currency?

First, it is important to realise that the rand is often hit harder in risk-off environments compared to its peers – a characteristic that can be attributed to the rand’s high level of liquidity, which sees it act as proxy for other emerging markets that offer poorer liquidity.

As a consequence, the rand nosedived when panic in the market reignited on Wednesday over news that the death toll had reached 31% in Italy, and that US President Donald Trump placed a ban on travel between the EU and the US, sending investors running from riskier emerging market assets and into safe haven assets. After making a brief recovery to R15.80/$ earlier in the week, this meant that the rand was trading 1.6% softer against the greenback and 0.38% against the euro by close of trade on Thursday, although 0.34% stronger against the pound.

The subdued weakness on the day against the euro and pound is attributable to the pressures facing those two currencies, as the Bank of England (BOE) and European Central Bank (ECB) deployed monetary stimulus which proved insufficient to stave off the panic. It is, however, important to note that the rand has suffered severe losses against all three major currencies over the past three weeks.

That said, while the global backdrop is by far the greatest cause of the sell-off in the local unit, we face some of our very own risks locally as well.

With the Moody’s rating review fast approaching – scheduled for 27 March 2020 – there is a great deal of speculation over the potential impact of the outbreak of Covid-19 in SA on our fiscal position. Considering the number of people supported by the fiscus, our fiscal metrics are likely to worsen as government channels money towards fighting the virus. This could very well tip Moody’s into a downgrade for SA, regardless of the promises made during our Budget speech to cut down on fiscal spending.

Additionally, while South Africa is still reeling from its horrific GDP numbers, economic data is set to continue to deteriorate as trade with some of our biggest trading partners (China and the EU) nosedives on the back of the global viral outbreak. And unfortunately, as the virus continues to spread further and further, having officially reached pandemic status on Wednesday, there seems to be little progress in knowledge of the virus, its contagion rate, as well as its fatality rate.

Global position

Of the countries outside of China, Italy is certainly the hardest hit at the moment, with the death toll significantly higher than the numbers reported in China. But is this a mere function of a free society versus that of a communist environment, or could it be that China intentionally muffled data? No one will ever really know for sure, but what we do know is that we are only at the start of the race against the virus, and financial markets are paying the price.

There’s an old saying, “When it rains, both sides of a wall gets wet,” and it cannot ring more true than in the current situation. We have seen powerhouse economies such as China and the US, all the way through to emerging markets such as South Africa face disruption, panic and financial market losses. A week ago, Citadel Asset Management’s global recession probability index was sitting at a mere 40%. By Friday, the likelihood has grown to 80% – a worrisome level indeed.

And while Covid-19 still has a relatively low fatality rate of 3.5%, the contagion rate – that each carrier will likely infect 3 other people – is where the real concern lies. The fear of being infected is running rampant on sentiment and economic activity, and with travel bans against Europe now being implemented by the US, it is becoming clear that the decline in economic activity in recent weeks is merely scratching the surface of the potential impact we could see unfold as we head further into 2020.

* Bianca Botes is a Treasury Partner, Peregrine Treasury Solutions.

BUSINESS REPORT 

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