[ad_1]
The fact that the rand is trading below R15 / USD clearly reflects international factors such as the outcome of the US elections, the development of vaccines and an abundance of liquidity.
This is the view of Maarten Ackerman, Citadel’s chief economist and advisory partner, who warns that some of the positivity around the local currency could reverse when the focus shifts to the local fiscus.
The first “bump in the road” will be the February budget speech, which will likely remind investors of the country’s poor local economic fundamentals, he said.
“Over time, as investors become aware of the economic reality in South Africa, the rand will come under pressure again. Therefore, while the rand is currently enjoying the benefits of global tailwinds, it is likely to weaken over the course of the year.
“However, the extent of this weakening will ultimately depend on the government’s progress on fiscal reforms, without which we could see the local currency heading north of R18 / dollar.
At 11:35 a.m. on Monday (January 4) the rand was trading at the following levels again with the major currencies:
- Dollar / Rand: R14.52 (-1.15%)
- Pound / Rand: R19.86 (-0.91%)
- Euro / Rand: R17.85 (-0.31%)
Facing tax demons
Ackerman said South Africa has been enjoying the glow of risk sentiment, the benefits of which are most evident in the local bond and currency markets.
“But, like tourists who allow the festive cheer to tempt them to spend freely on credit, South Africa’s law will eventually expire, forcing the government to come back to reality and face its fiscal demons,” he said.
“So far, the support of foreign investors in the local bond market together with the IMF loan have prevented the country from feeling the worst effects of the devastation of the pandemic.
“But the holiday will eventually end, and the government will have to significantly tighten its belt at the end of the three-year fiscal framework, or towards the end of 2022 and into 2023, especially when the first payment on an IMF loan is due. “
Even before Covid-19 hit, South Africa had come a long way to a fiscal cliff due to an unsustainable and unhealthy government budget. The pandemic simply accelerated the journey to the precipice, Ackerman said.
If the country wants to avoid a sovereign debt crisis or the risk of defaulting on our loans, the government will urgently need to implement long-awaited structural economic reforms, and markets will be on the lookout for evidence of action rather than just talking more over the next 12 years. months, he said.
South Africa lags economically as it speeds off the cliff
In terms of the local market, it is important to recognize that South Africa is currently lagging behind its peer group economically, and once the risk rally has faded and markets look beyond global drivers, our looming fiscal cliff and debt problems are reflected in our asset classes, Ackerman said.
“Most of the profits produced by JSE-listed companies are generated outside of South Africa.
“However, headwinds in the global environment could also leak into the local stock market, while a deteriorating fiscal situation and structural economic problems could hamper the prospects for those companies that operate only in South Africa. Therefore, investors should seek exposure to those companies that offer some immunity from the local environment. “
He said investors should also keep in mind that where the JSE has in the past acted as a useful proxy for emerging markets, as more and more emerging markets focus on Asia-Pacific, they should consider adding other exposure to the emerging markets for true diversification. .
“It is also worth noting that while the local bond market is one of the few in the world that can generate positive returns for investors in 2021, this should be treated with caution and investors should consider taking profits or even being underweight. .
Bond yields were trading around 9% in March 2020, and following Moody’s downgrade to underinvestment grade, these yields soared to 13% to compensate investors for the increased risk of government default.
“Since then, however, yields have returned to 9%, seemingly indifferent to the fact that our fiscal situation has deteriorated significantly due to the pandemic, and that our budget deficit will be double that forecast in early 2020.
“In light of this, it is highly unlikely that the local bond market will continue to trade at current levels indefinitely,” he said.
Read: This is who pays taxes in South Africa
[ad_2]
