Rand on the mend as Turkey lifts emerging markets
The rand could be poised for a sharp recovery once the dust engulfing emerging markets clears, according to the head of the economic research unit at Old Mutual Investment Group.
In a note to clients, Johann Els also said the market had overreacted to the recent GDP numbers, which showed that the SA economy had slipped into a recession for the first time in almost a decade.
The rand fell to a two-year low against the dollar last week, before regaining some of its losses. A weaker currency increases the cost of imported products, including vehicle fuel, which in turn raises prices consumers pay for goods.
The volatility in the rand has coincided with elevated international oil prices, leading some economists to believe that the SA Reserve Bank could raise interest rates when its monetary policy committee concludes its meeting on Thursday.
But Els said emerging markets are unlikely to go into a full-blown crisis and their economies are in better shape than they got credit for, with a few exceptions.
Turkey and Argentina’s currencies have recently been battered by emerging-market alarm and concern about the long-term economic health of the two countries.
But on Thursday, Turkey’s central bank responded with an aggressive increase in interest rates, asserting its independence from President Recep Tayyip Erdogan’s government.
Erdogan had called for lower interest rates.
The bank hiked rates by 625 basis points to reach 24%, which not only helped stabilise its lira, but also boosted emerging- market currencies. On Friday the rand strengthened to R14.935 against the US dollar, bouncing back from the two-year low of nearly R15.70/$ reached 12 days ago.
SA government bonds have also been strengthened, with the benchmark R186 last bid at 9.18%, from a recent 9.34% high.
SA needs structural reforms to put the economy on a sound and sustainable footing, Els said, and while he believed the groundwork had been laid by President Cyril Ramaphosa’s government, he needs a fresh mandate to follow through on economic reforms, which economists have long flagged as vital to unlock growth potential.
Els said he believes pessimism in SA has reached its peak, and things should start to get better.
“Should we see significant improvement in government policies after the 2019 elections, it will likely lead to a sharp recovery in confidence — including local consumer and business, and foreign investor confidence,” he said.
Economists at First National Bank said in a note that the SA currency is likely to have rallied on trader speculation that the Bank might be forced to raise interest rates, just like Turkey and Argentina recently have.
The SA interest rate decision “is almost too close to call”, said the FNB economists.
“The question becomes whether emerging markets have a definite change of momentum or is this just a knee-jerk reaction to the events in Turkey,” said Andre Botha, senior currency dealer at TreasuryONE.
Els said emerging markets had a “better structural position regarding growth, interest rates, current account and fiscal balances, and inflation, than … during 2013’s taper tantrum”.
The US Federal Reserve’s decision to taper its quantitative easing programme hit those emerging markets that were running huge current account and fiscal deficits.
Credit ratings agency Moody’s Investor Service last week said it believed the worst was over for the SA economy.
“This suggests that there could be a change of confidence in SA and that the rand could extend its gains,” said Botha
Correction: September 18 2018
An earlier version of this article incorrectly stated that Johann Els is the head of Old Mutual Investment Group. He is in fact the head of the economic research unit at Old Mutual Investment Group.