Remarkable rise of the Rand: Can it keep surging? Analysts size up risks

EDINBURGH — The election in December of Cyril Ramaphosa to head South Africa’s ruling ANC provided a much-needed spark to ignite positive investor and business sentiment towards the corruption-wracked country. The rise of the Rand in relation to other currencies is a reflection of a marked improvement in expectations for economic growth. Analysts note that other factors have played into the strengthening of the rand, from a weaker US dollar to a commodity price boom. Important in maintaining the Ramaphosa ‘feel good’ factor will be government plans rolled out in the national budget, to be unveiled in February. The details will indicate whether Ramaphosa has power within the ranks of the ANC to deliver on intentions to curb debt, boost employment and generally implement plans aimed at cleaning up South Africa’s finances. – Jackie Cameron

By Colleen Goko

Bloomberg – It’s looking like the latest emerging-market turnaround story: a 21 percent rebound from a one-year low for South Africa’s rand. The question is whether it will stay that way.

The currency traded stronger than 12 per dollar on Wednesday for the first time since May 2015, extending a rally sparked by Cyril Ramaphosa’s election as leader of the ruling African National Congress, and supported by global risk-on sentiment and the greenback’s retreat.

A collection of mixed denomination South African rand banknotes sit in an arranged photo in Johannesburg. Photographer: Waldo Swiegers/Bloomberg

“Three months ago we were staring down the barrel of total junk status,” said Warrick Butler, head of emerging-market spot trading at Standard Bank Group Ltd. “Today the mood has rotated 180 degrees.”

Here are the key drivers of the rally, and the risks that may derail it:

Political Outlook

The election of Ramaphosa as leader of the ruling ANC in December, setting him on a path to take over as head of state from the scandal-ridden President Jacob Zuma, has fueled optimism South Africa may avert further credit-rating downgrades as the new leadership takes steps to root out corruption and stimulate the ailing economy.

Moody’s Investors Service is now less likely to lower the nation’s credit rating when it reviews its assessment in March, according to UBS Group AG. The cost of insuring South Africa’s dollar debt against default for five years has dropped to the lowest since 2013, when the nation still had investment-grade ratings from three major companies.

qnS&P Global Ratings and Fitch Ratings Ltd. cut the country’s debt to junk in 2017 after the removal of Pravin Gordhan as finance minister in March. Moody’s put the nation on review for a downgrade in November. A reduction of the local-currency bond rating to junk would trigger an exclusion of South Africa’s rand debt from Citigroup Inc.’s World Government Bond Index, sparking a selloff by investors tracking the gauge.

“Lackluster growth, high unemployment and a deteriorating fiscal balance sheet require urgent reforms,” UBS strategists Jonas David and Michael Bollinger, who see the rand holding around 12 per dollar over the next year, wrote in a January 22 note. “In our view, the leadership has a window of opportunity to implement changes ahead of the 2019 general elections. Recent developments lower the probability of another downgrade.”

Commodity Prices

The commodity-price boom of the past seven months is providing support for the rand. South Africa depends on raw materials — including precious metals such as gold and platinum, as well as industrial metals — for more than 50 percent of its export earnings. That’s helped narrow the current-account deficit to 2.3 percent of gross domestic product, from as wide as 6.9 percent four years ago, easing pressure on the currency.

The shrinking external deficit “should limit the rand’s downside in times of less favorable global conditions,” Jonas and Bollinger at UBS wrote.

Investor Sentiment

Investors are becoming more bullish on South Africa. After dumping almost 47 billion rand ($3.9 billion) of South African stocks in 2017, foreigners are buying Johannesburg-listed stocks at the fastest pace on record in 2018. That’s helped propel the benchmark index to a record, led by shares of companies that depend on the local economy, such as banks and retailers.

“South Africa itself will be a big story this year,” said John Ashbourne, an economist at Capital Economics. “We think that the economic cycle has turned, and that growth will accelerate again this year. After years of downbeat forecasts, I think that a lot of analysts will be taken surprise by some good news out of South Africa.”

Dollar’s Demise

Continuing dollar weakness has supported most emerging-market currencies including the rand, and that’s set to continue in coming months, according to Swedbank AB. A gauge of developing-nation currencies is trading at its strongest level against the dollar in four years.

“Emerging markets are strong on the basis of a weak dollar and strong commodity prices,” said Hans Gustafson, chief emerging-market strategist at Swedbank. “Our forecasts have been adjusted upwards for all emerging market currencies as the dollar has depreciated faster than earlier thought.”

Lurking Risk

Even if Ramaphosa replaces Zuma as president, he may not be able to force through unpopular fiscal reforms, according to Informa Global Markets. The budget presentation on February 28 will tell whether the government has the will to curb rising debt and a widening budget deficit.

Zuma calling the shots. More of Zapiro’s brilliant cartoon work available at

“We are reluctant to turn too optimistic on the rand just yet, given somewhat murky medium-term prospects,” said Natalie Rivett, a senior emerging-market analyst at Informa. “We would expect to see some faltering of the rand as we head closer to the February budget, which will be the next key risk event and could be the deciding factor as to whether Moody’s will deal a blow to the sovereign’s local credit rating.”

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