OK, Tell Me More?
Eish, the Rand has been in a freefall amongst other emerging market currencies. Yesterday, it reached ~R15.55/USD – levels last seen during Zuma era scandals.
Hmm, Go On?
has found itself at the mercy of its president, threats of a trade war with the US and a growing pile of debt – bringing it to the brink of an economic meltdown. As part of this, the contagion
* has seen currencies in other emerging markets also suffer. Whilst this explains the short term shock experienced yesterday, there are other factors impacting the Rand.
What Other Factors?
Global investors must weigh up risk and reward of each investment option before deciding where to direct their money. They typically expect higher returns for investments that carry higher risk. Having said that, markets in the US and some parts of Europe are providing increasingly high returns on the back of robust economic growth, with relatively low risk. That means that markets like South Africa’s become less appealing as the risk-reward tradeoff doesn’t make as much sense now.
Global trade wars are another factor. A trade war may come with a decrease in global economic growth as global trade comes to a halt in the face of heightened tariffs (think import duties). This threat has investors concerned about their exposure to emerging markets – pulling out of the likes of SA and heading into safer, more developed economies.
Well, the Chinese economy may also be slowing down – meaning fewer exports for South African companies. With China accounting for ~10% of our exports, that’s a pretty big deal. But, local factors also play a part.
The shine of Ramaphoria has also worn off with media now referring to the present as “Ramareality”. This reality includes strangling debt levels, our government spending more than it makes, state-owned entities drowning in unprofitability and rampant unemployment – all underpinning an economy that some investors are panicking about. However, the recent volatility is likely only a function of short-term panics and probably won’t be sustainable. Time will tell.