South African Rand can go One of Four ways says RBC Capital

- ZAR has outperformed its peers over course of past month
- 4 paths ahead for SA economy and Rand
- SA Govt. following right path (for now)
- Eskom, public sector wage bill amongst key reforms

South african reform and the Rand

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There are four paths the South African government can take the country and its economy, with two of these paths being positive for the Rand according to new research conducted by economists at RBC Capital Markets.

In a new research note on the South African Rand, analyst Daria Parkhomenko at RBC Capital Markets says the government appears to be set on a path that will ultimately be supportive of the economy and its currency, however "we remain skeptical about the government’s ability to fully deliver on reforms & fiscal consolidation."

Following the economically bruising experience of the coronavirus crisis, that resulted in the country facing its worst slump in decades, the Rand is left as one of the worst performing of the world's major currencies but the crisis does allow the government the opportunity to press a reset button on economic policy.

Gross domestic product fell 16.4% in the three months to the end of June compared with the previous quarter, equating to an annualised rate of 51%.

RBC Capital says there are now four routes that the Government can pursue: 1) push through pro-growth reforms and fix its fiscal finances, 2) go to the IMF for a full-fledged program with conditions, 3) use prescribed assets to fund the government’s deficit/projects, and/or (4) have the SARB fund the deficit through quantitative easing.

"Paths 1 & 2 have the potential to be ZAR-positive, though it will ultimately depend on how much progress is made," says Parkhomenko. "Paths 3 & 4 would be ZAR-negative given they are likely to erode investor confidence and raise concerns about unchecked government expenditures (and potentially inefficient spending)."

Market scepticism over the government's ability to pursue pro-growth policies is high and this is reflected by the Rand being one of the worst performing major currencies of 2020, falling sharply in the wake of the global financial meltdown that ensued when covid-19 spread across the globe and stung emerging market currencies.

ZAR in 2020

Above: ZAR performance in 2020

Importantly the Rand has underperformed many of its emerging market peers as investors see specific and structural risks relating to South Africa.

Yet, the Rand has over recent weeks being attempting to claw back some of its 2020 losses, and a look at the currency's performance over the past month reveals it to be a relative leader:

ZAR performance past month

Above: ZAR performance over the past month

Parkhomenko says that for now it appears the government has been following 'path 1', an observation that might explain some recent outperformance.

A critical issue for the government will be fixing the electricity supply. "To raise growth, the main measure the government needs to implement is the stabilization of the electricity supply (e.g. “fixing” Eskom’s operational issues, increasing generation capacity outside of Eskom). The lack of a stable electricity supply has been a key constraint on growth, with loadshedding YTD already surpassing the levels reached in 2019 despite lockdown restrictions," says Parkhomenko.

In October 2019 the government unveiled plans to overhaul of its power sector by breaking up loss-making state utility Eskom over the next three years and opening the industry up to more competition, a long-awaited government paper showed on Tuesday.

Progress here will be key, however there are numerous other areas where reform is required and the task is sizeable. "Reducing the public wage bill will be one of the critical steps the government needs to deliver on," says Parkhomenko, adding:

"We remain skeptical about the government’s ability to fully deliver on reforms & fiscal consolidation."

RBC Capital's forecasts assume a gradual uptrend in USD/ZAR, though they appreciate their skeptical view is not out of consensus and "that makes the hurdle for ZAR-positive surprises low in the event the government succeeds or makes progress at a quicker pace than expected".


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The outlook for the Rand will not rest with the domestic challenges facing the government, but also with the broader evolution of global equity and commodity markets over coming months.

"While the underlying factors determining the rand’s value would suggest it should be weak, its movements have been largely driven by global factors and risk appetite. The local stimulus package pales into insignificance in comparison with that in the US and the rand strength has rather been a reflection dollar weakness," says Bianca Botes, Executive Director at Peregrine Treasury Solutions.

Key to the global outlook is the outcome of the U.S. Presidential election, with investors selling stocks in September as fears grew that the outcome would be close and therefore results in weeks of potential legal challenges and uncertainty.

However markets and the Rand started the new week in positive fashion amidst fading fears that the U.S. Presidential election in November will be inconclusive given challenger Joe Biden's ongoing rise in the polls.

The South African currency is being tipped by analysts to see an improved performance into year-end, particularly if the Democrats make a clean sweep of Congress and the Presidency in the November vote.

A new national poll showing President Donald Trump is now 14 points behind his challenger Joe Biden was released on the weekend, less than a month until the election day.

A NBC/Wall Street Journal survey indicating a 53-39% advantage for Biden. The poll showing Biden widening his lead over Trump was taken immediately after last Tuesday’s tumultuous first presidential debate in Cleveland, at which an argumentative president constantly interrupted both his rival and the moderator Chris Wallace.

Polls have a consistent lead for Democratic candidate Joe Biden, and given that pollsters have adjusted their methodology to avoid missing Trump's 'hidden' support, markets are steady in pricing a Biden victory.

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