The South African rand continued its recovery on Tuesday, strengthening to levels close to 14.0 per dollar, following last week’s budget-induced tumble.
USD/ZAR had climbed as high as 14.35 on Friday – the rand’s weakest level against the dollar in eleven months – as investors dumped South African assets in response to last week’s mid-term budget which exposed the country’s struggles with sluggish growth, falling tax revenues, rising national debt and high unemployment.
In his budget statement, South African Finance Minister Malusi Gigaba slashed the Treasury’s previous economic growth forecast for this year from 1.3% to just 0.7% and announced that the budget deficit would likely widen to 4.3% of GDP – well above the government’s target of 3.1%. Furthermore, Gigaba warned that 2017’s tax revenues would likely miss targets by R.51 billion ($3.64 billion).
In the aftermath of the budget, ratings agency Moody’s expressed concern over South Africa’s economic direction.
“Unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk,” Moody’s said in a statement.
The agency added that “the lack of fiscal consolidation in the budget is also a setback to already feeble business confidence and growth.”
“Feeble” is perhaps a generous adjective to use when describing business confidence in South Africa. One measure of confidence compiled by the Chamber of Commerce and Industry fell by 5.7 points in the third quarter to 89.6 – the measure’s lowest reading since the 1985 apartheid era.
It appears from recent changes in asset prices that markets have now fully priced in further sovereign ratings downgrades this year. Moody’s cut South Africa to Baa3 and assigned a negative outlook in June but, unlike Standard & Poor’s and Fitch, refrained from assigning a sub-investment grade, otherwise known as a “junk” rating. This discrepancy between Moody’s and its peers will likely be corrected when the agency next assesses South Africa on November 24th.
For the rand, the combination of economic and political fragility that prevails in South Africa, which may last for several years, appears to suggest only one direction ahead – lower – and that may indeed be the case against several of the FX majors, but against the US dollar the picture is perhaps less clear. Several major banks are continuing to forecast dollar weakness over the coming year – in September, ABN Amro expressed “strong conviction” on its bearish dollar predictions and Credit Agricole said this week that a recent dollar rebound was “unlikely to extend much further” – so the rand may benefit, or at least avoid a sharp depreciation, on the back of one currency’s weakness offsetting another’s.
In the short term, Standard Chartered’s chief FX strategist Warrick Butler believes that USD/ZAR rates in the high 13s can be achieved, but not much more.
Speaking to Reuters on Monday, Butler said that he could “certainly see a pullback to…13.85 as the shock and horror of our own Halloween budget speech starts to fade,” but after that the “picture is good for [USD/ZAR] bulls.”
Against the euro, the rand had weakened on Friday to 16.87 – a level not seen since June 2016 – but has since recovered to rates in the low 16s. Remarkably, the rand has lost more than 18% of its value against the euro since March, which is a hammer blow to South African importers who purchase most of their goods from eurozone countries.