The South African rand is suffering.
The rand’s marginal gains on Wednesday against the FX majors did little to mask what has been a horrible month for the currency.
Since September 6th, the rand has weakened by 7.6%, 6.3%, 5.0% and 4.2% against the pound (R.18.0), US dollar (R.13.6), euro (R.16.0) and Australian dollar (R.10.65) respectively, falling against each to long-term lows in the process. And the rand might not be done yet; not if the South African Reserve Bank lower interest rates in the coming months – an eventuality that wasn’t ruled out by the bank at its Monetary Policy Review on Wednesday.
“With near-zero growth and a negative output gap, there is some limited scope for lower interest rates to have positive counter-cyclical effects,” the bank said.
Economic growth in South Africa continues to be forecast by the bank at just 0.6% for 2017 and 1.2% for 2018. Inflation, on the other hand, has averaged 5.53% this year, which limits the Reserve Bank’s ability to lower the cost of borrowing in order to boost growth.
On interest rates, the Reserve Bank has done a good job of baffling investors in recent months. Following a completely unexpected rate cut in July – rates were dropped by a quarter-point to 6.75% – the bank surprised again in September when it left rates on hold. Prior to September’s meeting, seventeen of twenty-five economists polled by Reuters had predicted another quarter-point cut.
The powers that be in South Africa have been heavily criticized by the “big three” ratings agencies this year for interfering in monetary policy.
In July, Moody’s said that there was “growing political pressure for less independent monetary policy [in South Africa].” The agency went on to suggest that July’s shock rate cut was the result of political pressure being placed on the Reserve Bank, rather than being an act of economic wisdom.
In April, after South African president Jacob Zuma replaced well-respected finance minister Pravin Gordhan with Malusi Gigaba – a man seemingly unqualified for the role – Standard & Poor’s said that “the executive changes…have put at risk [South Africa’s] fiscal and growth outcomes.”
Fitch were equally critical, saying that “recent political events would weaken standards of governance and public finances.”
The agencies of course “walked the walk” by downgrading South Africa’s credit ratings. In April, Standard & Poor’s and Fitch both dropped the country to sub-investment grade – more commonly known as “junk.” Moody’s went one grade higher in June to Baa3 but assigned a negative outlook.
Such is the apparent political interference in South Africa that in August, the governor of the Reserve Bank, Lesetja Kganyago, went to South Africa’s High Court to challenge a proposal by the state ombudsman to have the bank’s mandate changed. The ombudsman had proposed that the bank place more emphasis on the “socio-economic well-being of citizens” when forming monetary policy, rather than measures of inflation, which central banks typically focus on. The court sided with the Reserve Bank.
While up-to-date price forecasts for the rand are thin on the ground – a Reuters poll of forty-five strategists in August produced a median-estimate of R.13.5 per US dollar by January’s end – what is very clear is that investors are expecting rand volatility to pick up ahead of December’s leadership contest of the ruling African National Congress party.
Implied three-month volatility in rand FX options has climbed this week to a six-month high of 17.2%, from levels close to 14% one month ago.