The SA Daily
07 April 2020
EM currencies embattled
Shireen Darmalingam
- The rand regained some ground after sliding to its lowest level yesterday of $19.35/$ in the wake of the SA sovereign downgrade by Fitch ratings agency last Friday — but it’s still shed 25.3% to the USD since this January. Since early April, it’s already 4.8% weaker, and also weaker than EM (emerging market) peers since January. The Mexican peso and Brazilian real too have shed over 23% since January as investors abandon risk assets in search of safer havens amid the COVID-19 pandemic. However, the rand will likely soon be approaching the worst of its weakness to be ascribed to this pandemic.
- Still, the rand will remain under strain as the SA economy continues to grapple with weak activity. SA’s 21-day lockdown makes some growth “irrecoverable”, likely further extending our streak of posting poor growth. SA now is in the longest downward cycle since WW2. The SARB noted yesterday in its Monetary Policy Review that the forecasts published at the time of the March MPC meeting are already outdated. Then, the SARB expected the economy to contract by -0.2% in 2020. Now, the central bank sees GDP growth in 2020 contracting by between -2% to -4% due to the coronavirus pandemic. We forecast GDP to contract by -5%.
- The SARB said that “better long-term growth prospects will therefore require a range of interventions, many of them outside the domain of the central bank”. The bank has already cut the repo rate by 125 bps this year in response to poor growth and COVID-19. We expect yet further cutting of a cumulative 125 bps, to 4.0%, by the end of 2020.
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