The emerging market space has done well this year, so far – TreasuryONE’s Andre Cilliers

Andre Cilliers, currency strategist and director at TreasuryONE, joins Alec Hogg for a discussion on currency markets. After the second quarter results (the three months to the end of June) emerging market currencies (which includes the rand) had their best three months against the US dollar in seven years. Cilliers notes that this shows us how well emerging markets have done during this period. – Jarryd Neves

Andre Cilliers on emerging markets:

If we look at the rand and the levels that we’ve reached in that quarter – we’ve been as low as R13,40 – then that tells us the story, just how well the emerging market space has done in that period. Towards the end of the quarter, it ran out of steam a little bit – but we can discuss those factors. We’ve certainly had a fantastic quarter.

We’ve had a fantastic year so far – both the first and the second quarter. hat was, for us, mostly linked to commodity prices that had done extremely well in that period. But we must also not forget that that was also the period where Covid-19 took a little bit of a back step in the start periods of that first and second quarter – and economies started getting back on to steam and growth started showing.

On the implications of the third wave on economic growth and emerging markets:

We know that the restaurant industry is basically closed again. To say that they can survive on takeaways; it’s simply just not going to happen. There are a lot of jobs being lost. There’s an impact definitely on the economy. The tourism sector is in the doldrums. In Gauteng, people cannot leave the province for leisure purposes. We must not forget that Gauteng is the hub of the country. I reckon somewhere between 50% – I hear people say the figure is 60% – of all tourism emanates from Gauteng into other provinces.

That certainly will have a dramatic impact, especially since we’ve not really seen international travellers pouring back into the country. We’ve also seen that the airlines have actually suspended their flights in most cases – not only for the first week or so of the lockdown, but for the whole of July. That spells very negative things for our economy and the impact going forward.

On what this means for the currencies:

I think the second half [of the year] can be very different. We must keep in mind that a weak economy in South Africa generally bodes well for the exchange rate. That’s simply because the weaker the economy, the less you import – because there’s just no use and/or demand for products. Generally, under normal circumstances, a weak economy will bode well for the exchange rate, because your exports continue to be on the high side and imports low.

We’ve seen that weighting our trade figures in the first and second quarters. The third quarter, to me, spells a little bit something different. Even with demand being low, we might not see a positive effect on the exchange rate and that would be linked to a third wave. It would be linked to very slow vaccinations and a walk of financial transactions. Foreign investors will take their money and they will run because that will tell them that this economy, at the slow pace of vaccinations – it’s estimated at the rate that we vaccinating people, that we will only get to about 50% of the population by the end of 2023.

That’s a long time off, and if that’s the case, the continuous negative effect on the economy will make investors take their money and run to countries where vaccination rates – and there’s many of them, not only first world countries – are ahead of us. I’m afraid that even with low demand, the impact of the third wave and the slow vaccination process might turn things around in the third quarter. We could see some nasty, negative influences on the exchange rate.

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