After the Chinese stocks plunged on 24 August, South Africa’s rand hit an all-time low and touched ZAR 14 per US dollar, after having already lost more than 11% against the US dollar since the end of last year. The weaker rand fuels inflation and puts pressure on the central bank to raise domestic policy rates, even though this would further cripple its struggling growth rates. Nonetheless, the international sell-off of South African bonds will probably force another interest hike this year on top of the 25 basis points rise to 6% in July.
Impact on country risk
The strength of the US dollar and better growth projections in the developed world contribute to a weaker rand. Moreover, the rand follows the tumbling track of international gold, platinum and coal prices, South Africa’s major export commodities. Without any significant rebound in commodity prices projected in the near term, pressure on the rand is likely until year-end. For now, policy rate hikes are unlikely to support the currency as fundamentals are overruled by the negative market sentiment that has been affecting emerging markets for some time now, fed by concerns over China’s growth, falling international commodity prices and the future hike in US interest rates. Capital flows have been shifting away from emerging markets toward the developed world, deeply affecting a financially globalised economy like South Africa. Consequently, the country’s outlook has deteriorated among low growth potential (weak fundamentals and severe power crisis), rising state inefficiency and financial vulnerabilities, while a weakened rand will moreover increase US dollar-denominated debt liabilities and debt servicing costs.
Analyst: Louise Van Cauwenbergh, email@example.com