In exactly a week, it will be five months since the last time Reserve Bank governor Lesetja Kganyago delivered an interest rate cut. While he gave a fairly optimistic outlook, he did acknowledge that inflation had probably reached the low point of the current cycle, and so it has come to pass.
What Kganyago couldn’t foresee was the fate awaiting the rand. At levels prevailing at the time, the central bank’s models assessed the rand to be "somewhat overvalued", with the governor saying further strengthening potential was limited.
Not only has the rand not strengthened since those days, it has collapsed. The reasons vary from US President Donald Trump’s trade war rhetoric to domestic policies about land expropriation. The Land Bank, which presented its financial results on Monday, gave some interesting comments on the latter, highlighting the dangers that lurk when populism overtakes evidence-based research as the basis for policy change.
The most recent trigger for the rand’s fall has been the collapse of the Turkish lira. It’s perhaps ironic that for weeks the rand was initially shielded from the events in Turkey. Then the lira sell-off was seen as mostly a domestic affair, driven mostly by its president’s efforts to impose his authority on the central bank, leading to policy that was ridiculously loose relative to the inflation rate, which jumped to a 14-year high in June at more than 15%.
IT’S PERHAPS IRONIC THAT FOR WEEKS THE RAND WAS INITIALLY SHIELDED FROM THE EVENTS.
SA, on the other hand, could point to its independent central bank and to the fact that there was no question of its policies being imposed by politicians, never mind the rather pointless discussions about its potential nationalisation, mainly driven by the EFF populists.
Things started to change when Trump got involved, ostensibly over the imprisonment of an American pastor in Turkey. This soon escalated, with the US increasing tariffs on Turkish steel and aluminium imports, and Turkey retaliating by penalising some imports from the US. In the meantime, Turkey’s currency and economic meltdown started taking a more international dimension, raising concerns about the potential harm to major European banks that have exposure to that country.
This was bad timing for SA, as economic data from manufacturing to retail sales pointed to a weakening economy and a potential recession. So from two-year highs earlier in the year— the rand was trading at less than R12/$ on March 28 — the rand has lost almost a fifth of its value. That makes it the worst performer among the 16 major currencies tracked by Bloomberg. On a broader measure including some emerging-market currencies, only Argentina’s peso and Turkey’s lira have fared worse. So it should come as no surprise that economists are predicting that data on Wednesday will show SA’s annual inflation rate accelerated sharply in July to more than 5%, the highest since September 2017.
And it’s even less of a surprise that economists are starting to talk about a potential rate increase, possibly as early as the next monetary policy committee meeting, scheduled for September. Based on recent comments by Kganyago and his deputy, Daniel Mminele, this would seem to be premature. They have emphasised that they have an inflation mandate and will not intervene to support the currency, unless there is clear evidence that this will lead to a sustained increase in prices.
We have seen in the past six months how quickly sentiment can turn, so it would be a mistake to be fatalistic when looking at the currency’s prospects. An argument may well be made that traders were probably too optimistic in accumulating long positions on the currency earlier in the year, leaving it exposed once global sentiment turned against emerging markets more broadly. The danger for investors is that the pessimism will be similarly overdone and they’ll miss out on the upside.
Not everyone will have lost sight of the attractive returns on offer in SA. The R186 bond, for example, yields 9%, and a similar maturity paper in Germany less than 1%. That could prove compelling when calm returns.