Rand scores from growing risk appetite

THE RAND continued its renewed gains against the dollar yesterday, strengthening 0.4 percent to R16.79 after emerging market currencies benefited on investor bets that the global economies would recover faster from the Covid-19 pandemic, despite rising US-China tensions.

The MSCI Emerging Market Currency Index rose 0.11 percent on global sentiment as investors continued their search for higher yields on hopes of a quick global economic recovery, despite the global surge in Covid-19 infections.

The dollar has been weighed down by the US’s battle to contain the spread of the coronavirus

The US on Monday rejected China’s disputed claims to offshore resources in the South China Sea, a move that broadened tensions between the two countries from trade, technology and sanctions, to now also include territorial disputes.

However, China reported an unexpected increase in both imports and exports in June, suggesting its economy, the second biggest in the world and a large importer of South African mineral commodities, was continuing to recover.

On Monday international credit ratings agency S&P Global downgraded South Africa’s 2020 GDP to -6.9 percent from an earlier forecast of -4.5 percent due to the worsening pandemic in the country.

S&P said South Africa had the highest number of confirmed virus cases in Africa, with more than 270 000 infections, and 4 000 deaths.

“The pandemic situation in the country has worsened since our previous macroeconomic update, leading to a further hit to confidence, which was already low before the pandemic, amid lack of growth and concerns about the fiscal trajectory,” the firm said.

S&P, Moody’s and Fitch have rated South Africa’s sovereign debt at below investment status. S&P cut its rating one notch to the third tier of non-investment grade, BB- in April, with a stable outlook.

S&P’s GDP forecast was more optimistic than the National Treasury’s prediction of a 7.2 percent contraction.

Treasury said that debt to GDP would breach 80 percent as government needed to borrow more to fund its response to the pandemic.

President Cyril Ramaphosa announced a R500 billion relief package in April, equivalent to 10 percent of South Africa’s GDP.

Part of the reason for Moody’s downgrade of its GDP forecast in that month was that the package would weigh on the country’s finances.

“The sizeable fiscal package will only partially mitigate the economic toll, but coupled with lower revenues, will lead to a significant increase in government debt, further impairing public finances,” S&P said.

Investec chief economist Annabel Bishop said while the rand was likely to make further gains on global data showing a lessening in the weakness of the global second quarter economic performance, it did not mean there would be a steady recovery or the global economy was in a secure expansion.

She said the rand was expected to strengthen in the medium term after reaching R16 a dollar by year end, moving towards R15 next year.

“The global economy is in the process of a patchy recovery, with markedly strengthening data readings coming out from April’s many data lows, and is likely now in the process of attempting to return positive growth for July, although this does not mean the recovery will be linear, or across all areas,” Bishop said.

“Lags will occur for many variables, while the recovery itself is likely to be stop and start in nature, and the Covid-19 pandemic has not come to an end globally.

“However, lockdown measures have eased substantially, the global supply chain recovery is beginning, although itself will be patchy and does not see sufficient demand to support it yet.”