EDITORIAL: Just when things were beginning to look up for the rand...
Bond markets provide a more accurate picture of what’s coming
After sliding above R15/$ and flirting with R20 against the pound in early September, the currency had a good month in the end, the best since January when the country and markets breathed a collective sigh of relief after Cyril Ramaphosa’s narrow victory at the ANC conference in December 2018.
Of course that didn’t last. The combination of emerging-market jitters, higher oil prices and the trade war between the US and China saw the rand being punished, falling to a 2018 low of R15.69/$.
Domestic developments were also key, none more than President Ramaphosa’s ill-advised statement on July 31 that the ANC would seek to change the constitution in order to explicitly allow for the expropriation of land without compensation. There was also bad news on the economy, which slipped into a recession in the first half, the first time that’s happened since the global financial crisis was at its peak nearly a decade ago.
Politicians, predictably, tried to minimise its significance by insisting on inserting “technical” before “recession”. But there is no denying that this was a major setback and an indictment of the country, seeing that, unlike in 2009, this happened as global growth was picking up.
Compared with what had come before, September was a good month. The 4% gain in the rand against the dollar was only bettered by the Turkish lira, which had sparked the initial panic, and the Chilean peso.
The debate about land had calmed down to some extent, and interest rate hikes from countries such as Turkey, Argentina and Russia seemed to be finally working and attracting cash back into emerging markets. It was an environment well suited to a recovery for the rand, which, because of the sophistication and openness of SA’s financial markets, tends to suffer disproportionately when investors are bailing from emerging markets and seeking safety in developed ones.
But have we come back to earth? After reaching a one-month high around R14/$ on September 27, the rand has more than given up its gains for that month as a whole, and is at the bottom of the pile among 24 emerging currencies tracked by Bloomberg since then.
This is bad news at a time when oil prices are rising, with Brent crude climbing above $86 a barrel this week and some analysts seeing it reach $100 by Christmas. The latest petrol-price rise to above R17/l may have just been a sign of more pain to come. It’s going to be a while before energy minister Jeff Radebe claws back the cost of his intervention to limit the petrol-price hike in September.
This time the trigger has been data showing the US economic recovery is gathering pace, meaning that the US Federal Reserve may soon be in a position to increase the pace of interest rate increases. Ironically enough, the rand actually gained in the wake of Friday’s data showing that the US unemployment rate has dropped to the lowest level since 1969. Nothing too much must be read into that, as it reflected some disappointment that the September payrolls number missed estimates, leading to dollar weakness.
Bond markets provided a more accurate picture of what’s coming. Yields on Treasuries, considered the safest investments in the world, jumped, with 10-year rates reaching a seven-year high. So if investors can get higher returns buying virtually risk-free assets, it goes without saying that demand for those that are deemed to pose higher risks will suffer. So the rand isn’t likely to make a sustained recovery anytime soon.
Currently, SA’s R186 bond yields an annual 9.2%, which is about six percentage points more than Treasuries with a similar maturity profile. The South African bonds are just one Moody’s downgrade from junk status. So if investors judge that spread to be insufficient to compensate for the higher risk, they will want higher yields to buy our bonds, placing upward pressure on local interest rates.
Considering how close the Reserve Bank’s September call to keep rates unchanged was, it’s becoming harder and harder to see a scenario where SA avoids a hike later in 2018.