Lack of reforms may see more rand losses

The rand’s biggest intraday drop in six weeks could be a sign of more to come if President Cyril Ramaphosa fails to enact growth-boosting reforms while the global environment worsens, analysts said.

Wednesday’s decline pushed the rand, which often acts as a proxy for investor sentiment towards emerging markets, above R15/$ for the first time since September 4, as Democrats’ move to impeach US President Donald Trump added another layer for a global economy that was already reeling from US-China trade tensions and a slowdown in key markets such as the eurozone.

The JSE fell 1.3%, dropping alongside its European and Asian counterparts.

Locally, the losses came as an SA Reserve Bank report showed that the economy was in the grip of its longest downward cycle since World War 2, highlighting the need to boost an economy that is set to only grow 0.6% in 2019, and is strangled by an unemployment rate of near 30%, and business confidence at its weakest since the days when PW Botha was president.

“It is critical that structural issues impeding growth are urgently addressed,” said Piotr Matys, an emerging-market strategist at Rabobank.

He said the rand could drop to R15.60/$ by the end of 2019 if

Ramaphosa did not deliver on reforms and the global picture remained gloomy.

The rand is down just over 4% against the dollar so far in 2019.

Further declines, which will push up the price of imported goods such as oil, will constrain the Bank’s ability to provide relief through an interest rate cut by the end of 2019.

SA’s currency dropped 0.9% to R14.99/$ by 6pm on Wednesday, having lost as much as 1.3% earlier in the day, the biggest drop since August 14. It was 0.2% weaker at R16.4158/€. It gained 0.2% at R18.5389/£ as the pound was put under pressure by the political crisis engulfing Prime Minister Boris Johnson.

The rand is likely to remain under pressure in coming weeks, with investors awaiting finance minister Tito Mboweni’s medium-term budget policy statement on October 30 for evidence of progress in efforts to stabilise government finances and fix Eskom, the power utility that has been described as the biggest risk to the economy.

Moody’s Investors Service, the only major ratings agency with an investment grade on SA, is set to publish its review shortly after Mboweni presents the medium-term budget. Failure to produce a plan will increase the risk of a change in outlook to negative from stable, putting SA on course for a possible downgrade that may see bond investors pull billions of rands.

“If there is any uncertainty in the market regarding Eskom, any negative feedback will cause the rand to weaken although a lot of negative news has already been priced in,” said Nico du Plessis, an analyst at Mercato Financial Services. He said any domestic news that is “semipositive” could see the rand strengthen with fair value anywhere between R13-R14/$.

The rand fell with other emerging market currencies after the US House of Representatives announced an impeachment inquiry over allegations Trump sought assistance from Ukrainian authorities to investigate former US vice-president Joe Biden.

“China’s economic indicators are having an increasing impact on emerging-market currencies as investors fear the trade war is having a larger impact on China’s growth than can be mitigated by loosening monetary policy,” Monex Europe analyst Simon Harvey said.

4% the rand’s drop against the US dollar so far in 2019