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The SA Daily 13 August 2019

Emerging markets on edge

  • The rand yesterday slid to R15.57/USD, significantly worse than three arithmetic moving averages; 50-day, 100-day, 200-day. It’s much weaker now than at the July MPC when the SARB cut the repo by 25 bps. Before that, the d appreciated 3.6% since the MPC meeting in May when rates were kept on hold.
  • The SARB will therefore likely keep policy rates unchanged at the next two MPC meetings before year-end due to the rand’s weakness incurred by a number of local and global risk factors — despite entrenched sluggish growth and relatively anchored inflation expectations. In addition, the increased risk of ratings downgrade, increasingly priced in by the SA credit default spread (CDS), would also stay the SARB’s hand.
  • We still don’t foresee Moody’s downgrading SA in its next review on 1 November. However, such a downgrade, and the resultant WGBI expulsion, should trigger only a short-lived market reaction should policy reforms be forthcoming thereafter. Both the rand and SA bonds seem to be discounting a one-notch downgrade though.
  • The extent of SA markets’ recovery will depend on two, opposing, factors; the extent of further Fed rate cuts (with a positive impact on EM currencies from a global financial conditions perspective), and the extent to which the US-China trade war worsens risk-off sentiment (with an adverse effect on EM currencies).

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