Brexit fallout exposes SA

Investors are also uncertain

SOUTH AFRICA is the most exposed sub-Saharan African state to market volatility and a potential shift in investors’ risk perceptions linked to Britain’s decision to leave the EU, ratings agency Moody’s said.

“South Africa’s current account deficit leaves it vulnerable to short-term capital outflows amid changes in investors’ risk perceptions and appetite,” Moody’s said in a report yesterday.

The rand stumbled nearly 5 percent against the dollar on June 24, its biggest daily loss in almost five years, after Britons voted in a referendum to leave the EU, triggering global risk aversion.

Because of South Africa’s highly liquid market and its reliance on portfolio flows to plug a current account gap of around 5 percent, the rand tends to be more sensitive than emerging market peers to swings in risk appetite.

Moody’s said South Africa, already grappling with the impact of a severe regional drought and a slide in commodity prices due to subdued demand from China, would probably avoid a recession in 2016.

But the speed of any likely economic recovery and medium-term growth, which are already constrained by structural impediment, could be adversely affected if Brexit were to lead to increased risk aversion.

“Countries such as South Africa that rely on private-sector capital inflows to finance large current account deficits are at greater risk than others,” Moody’s said.

Ratings agencies and investors are also uncertain about the direction of economic policy in South Africa after President Jacob Zuma triggered a political storm by changing finance ministers twice in less than a week in December.

Pretoria dodged downgrades to its investment-grade ratings from Moody’s, Fitch and S&P earlier this year, but still faces the danger of sliding into “junk” by the end of the year if the economic outlook deteriorates.

On Thursday, the International Monetary Fund cut its 2016 growth forecast for South Africa to just 0.1 percent from the 0.6 percent seen in May.

The Treasury’s own latest forecast is more optimistic at 0.9 percent. – Reuters

PICTURE: EPA Polish Prime Minister Beata Szydlo and British Prime Minister David Cameron at a meeting in Warsaw, Poland yesterday. They discussed the political situation after the Brexit referendum, rights of Poles in Great Britain and Polish-British co-operation...