JOHANNESBURG - Economists expect the Reserve Bank to hike interest rates next month as South African assets and the rand continue to take a beating as risk adverse investors take flight on the double whammy of domestic populist rhetoric and emerging market fears.
On Friday the local currency continued to flirt with the key R15 to the dollar level and by 5pm was 16c lower at R14.7842.
The rand is being hit by talk of a bill introduced by Economic Freedom Fighters (EFF) leader Julius Malema to nationalise the South African Reserve Bank (Sarb) and concerns around land reform, which is causing economists to say the Ramaphoria effect has ended.
Free fall mode
Chris Harmse, the chief economist at Rebalance Fund Managers, said on Friday it seemed that the currency was in a free fall mode, just like at the end of 2015, when former president Jacob Zuma fired the then finance minister Nhlanhla Nene.
“The euphoria after the election of President Cyril Ramaphosa, or Ramaphoria, seems to be over and the realities of the challenges facing the ruling party become evident.”
He said with the rand trading at R14.80 to the dollar on Friday this was 72 cents weaker than the R14.08 to the dollar of the previous Friday and down 11.9 percent since the beginning of August.
Investec chief economist Annabel Bishop on Friday said risk-off had turned against South Africa specifically. Risk-off investing describes a process where investors move to riskier potentially higher yielding investments and then back again to supposedly lower yielding investments, which are perceived to have lower risk.
“Investors worry about diminished prospects for SA agricultural production, and so for general economic growth and private sector property rights. Proposed nationalisation of the Sarb also tripped up the rand.”
She said foreigners sold a hefty -R3.1 billion worth of local equities net of purchases on Thursday, as prospects for South African growth were seen to diminish as private sector property rights come under increased threat.
“Further marked rand weakness today (Friday) indicate likely further foreign sell-off of SA portfolio assets. Foreigners sold -R0.8bn worth of SA gilts net of purchases yesterday, as fiscal consolidation comes under risk from weak economic growth.”
Bishop warned that the ongoing populist direction of South Africa’s actual and proposed economic policies continued to damage investor sentiment and economic growth.
“With SA continuing to see weak fundamentals, particularly weakened institutions and competitiveness, and rising government debt ratios, along with half a decade of weak economic performance, there is little impetus for rand strength from purely domestic factors – unless the politics in SA move away from the increasingly populist direction of recent years, towards a more investment friendly approach.”
Skirting recession
She said South Africa’s second quarter data was showing that the economy was skirting recession, particularly as second quarter agricultural production was likely to record a contraction close to -20 percent quarter-on-quarter seasonally adjusted annualised basis.
The country’s economy shrunk to its worst in nine years in the first quarter, after contracting 2.2 percent in the period. Bishop said South Africa’s future growth was also seen at risk on ongoing local institutional weaknesses.
The Reserve Bank’s Monetary Policy Committee meets next month and could hike interest rates by 25 basis points as early as this meeting, if the rand successfully pierced R15 to the dollar and continued weakening, she said.
“SA petrol prices would be at risk of rising further, and there would be a negative impact on the cost of living and future inflation. Monetary policy credibility in SA is a key underpin to the country’s credit ratings, while Turkey’s monetary policy (which is under control of its government) continues to undermine its financial stability in contrast,” Bishop said.
Tsitsi Hatendi-Matika, head of retail investment specialist at Absa’s Wealth and Investment Management, said the rand, similar to other emerging currencies, had been affected by the stronger dollar and more recent geopolitical tensions between the US and Turkey, “notwithstanding the issues between the US and China”.
“We anticipate that monetary tightening in developed markets and pressing local questions around the independence of the central bank, lack of clarity around the land reform policy and the mining charter are some of the bigger issues, which will all keep the currency on the back foot,” Hatendi-Matika said.
“We anticipate higher levels of volatility in the near- to medium-term and the Absa research team forecasts the rand ending the third quarter at R14 against the US dollar, and being at R14.25 by year-end,” she said.
Momentum Investments economist Sanisha Packirisamy said part of the rand’s weakness had further been prompted by US dollar strength.