‘Ramaphoria’ evaporates

If there were any doubts that the euphoria following Cyril Ramaphosa’s election as president of South Africa has evaporated, this week’s rand slump has removed them.

The currency has plunged to a level last seen when Jacob Zuma was still in charge, having retreated from a three-year high amid a toxic mix of negative economic news, political risks and falling commodity prices. An investor retreat from emerging markets has accelerated its slide of almost 10% against the dollar this month.

In February, Ramaphosa promised to stimulate growth and attract investment, fix the finances of state-owned enterprises and root out corruption. Investors took note: the rand surged to a three-year high and borrowing costs fell as inflows into the country’s bonds and stocks surged. The mood was dubbed “Ramaphoria.” There’s no sign of it now.

The change started in April as rising US interest rates and a strengthening dollar sapped demand for emerging-market assets. While crises in Argentina, Turkey and Russia provided the context, homegrown problems fuelled the retreat.

The economy contracted in the first quarter as the current-account deficit widened, highlighting the vulnerability to capital outflows. Mining production has slumped and manufacturing and consumer spending haven’t picked up the slack. A widening budget gap has limited Ramaphosa’s ability to boost infrastructure and social spending.

“SA faces domestic challenges at a time when the external backdrop is less positive for risky assets,” said Piotr Matys, an emerging-market strategist at Rabobank.

The rand dropped 2% on Wednesday to 14.52 per dollar. It hit 15.55 on Monday, the weakest since June 2016. The cost of insuring the country’s debt for five years using credit-default swaps climbed 14 basis points to 219. Moody’s Investors Service rates SA’s foreign and local debt at Baa3, the lowest investment level.

The tipping point came on August 1, when Ramaphosa announced he would seek a constitutional amendment to allow expropriation of land without compensation.

ANC chairperson Gwede Mantashe stoked the concerns on Wednesday by proposing white farmers should be forced to hand over excess land, on a day that Moody’s and the Reserve Bank governor sounded warnings on the economy. – Bloomberg

SA faces domestic challenges at a time when the external backdrop is less positive for risky assets. Piotr Matys Emerging markets economist at Rabobank