Foreign Exchange Specialists, Citadel Global, unpack recent events.
One cannot deny the chaos that has ensued since the recent incarceration of former South African President Jacob Zuma, that has now made headlines across the globe. On the one hand, many international investors consider his arrest as a positive development for democracy and a boost for business confidence, while others might regard the violent protests and looting as a deterrent.
A question many would like answered: How does this affect the rand?
Bianca Botes, Director at Foreign Exchange Specialists Citadel Global, shares her insights on the recent events.
THE IMPACT OF LOCAL FACTORS ON THE RAND
As South Africans, we are often of the opinion that the local currency will be dominated by occurrences within our borders, albeit economic of political in nature. In reality, it is quite the opposite. Most of what drives the rand is based on global events and risk sentiment within the global financial market environments.
“Over the past few months, we have witnessed the significant recovery of the rand from the COVID-19 pandemic-induced lows which topped R19.30 in April 2020, however, this recovery is not attributed to events that have occurred within the country. Locally, South Africa still faces a dire economic trajectory, which was only worsened by the pandemic,” says Botes.
ARREST WON’T AFFECT THE RAND, BUT RIOTS AND LOOTING WILL NEGATIVELY IMPACT THE LOCAL ECONOMY
It might come as a surprise to many that the arrest of Zuma, although a positive sign for local sentiment, has had no significant impact on the rand.
Says Botes: “In reality, Zuma’s arrest has been overshadowed by the real economic hurdles South Africa will continue to face, whether he remains behind bars or not, alongside global factors such as reflation, stimulus and global growth.”
Despite this, there is a real concern as to the effect protests and looting will have on the economy. The violence is likely to offset any positive inroads made into South Africa’s global reputation by Zuma’s imprisonment, and the damage to property as well as the job losses to follow, will certainly add to the fragility of the local economy.
NO PANIC REQUIRED
“While the national tension will bring negative sentiment, it will not be responsible for a dictation of the direction of the rand – it will merely be one of the factors contributing to it, among many others,” says Botes, adding that other local factors forex specialists will be closely monitoring is Eskom’s electricity supply and the ongoing local economic turmoil due to COVID-19.
Although emerging market currencies are trading softer, a risk premium has been built into the rand due to the unrest. As political tensions and riots have seen numerous economic hubs come to a standstill due to fear of looting, the rand will trade slightly softer against the dollar.
The following global factors will continue to drive the direction of the rand over the coming months:
- Global growth and inflation.
- The rising COVID-19 cases and its effect on the global economic outlook sentiment.
- Additional fiscal stimulus expected from US President Joe Biden.
- Monetary policy action by central banks, including but not limited to the Federal Reserve (Fed) and European Central Bank (ECB)- interest rates and quantitative easing (asset purchases). Rising interest rates in the rest of the world will dampen the appeal of riskier emerging market assets.
“It is understandable that people are concerned about the consequences recent South African events could have on the rand, however, it’s important to remember that the global climate is currently just as fragile, and those global factors will be of more significance than recent events,” concludes Botes.