South Africa has been hit by the perfect storm of bad news over the past week, with the ongoing energy crisis, poor GDP data, falling business confidence and a current account deficit moving into negative territory. global financial markets.
Unsurprisingly, the rand took a beating over the same period, weakening to R18.74 against the dollar at one point before recovering to around R18.20 early in the week.
According to Annabel Bishop, Investec’s chief economist, the rand is heavily undervalued due to high risk aversion in global financial markets and particularly negative investor sentiment towards South Africa due to deteriorating growth prospects as manufacturing capacity deteriorates.
“Versus the euro and the pound, the domestic currency is also heavily undervalued and underperforming against the crosses, near the bottom of the Bloomberg EM currency ranking on an annual comparison,” she said.
The downward pressure on the rand stemmed from disappointing GDP data in the fourth quarter (a contraction of 1.3% against market expectations of -0.4%), reflecting the devastating effect of the brutal shutdown of the economy. on the economy, and the unexpected downturn in South Africa’s credit rating outlook by S&P Global.
S&P Global made a voluntary revision to its outlook, changing its outlook for South Africa from previously positive to stable. This brings S&P in line with other major rating agencies, Moody’s and Fitch, on South Africa’s economic outlook.
South Africa’s deepening electricity crisis came at a bad time against the backdrop of materially risk averse sentiment in global financial markets, while the divestiture also adds to the cost environment, with South Africa’s still high inflation the edge is weakening,” Bishop said.
“All rating agencies have expressed concern over SA’s weakening economic growth prospects, with Moody’s recently saying the country’s longest-ever power outage is credit negative.”
Bishop said rating agencies are taking a wait-and-see approach to South Africa’s electricity crisis, with a slow recovery from the electricity crisis raising the risk of a downgrade.
Economists at the Bureau of Economic Research (BER) said a downgrade is unlikely at this stage, but even without the immediate threat, the local economy is in trouble. Even if South Africa managed to avoid a technical recession, the country’s growth prospects are extremely limited and unlikely to exceed 0.5% for 2023, the BER said.
Investec said heightened risk of a downgrade and lower growth prospects have affected its economic scenarios for South Africa.
A notable change across all scenarios is that South Africa has been graylisted by the Financial Action Task Force (FATF), meaning that scenarios now depend on how long the country remains on the list.
Note: The main changes in the scenarios are in italics.
Extreme advantage
Probability: 1% move from Rand: strong Q1, averaging R16.60, heading to R15.90 in Q2, R15.50 in Q3 and R15.00 in Q4. Conditions: Strong economic growth (3% to 5% in 2023, then 5% to 7% in 2024) Good governance with growth-enhancing reforms Strong property rights, no nationalization or land expropriation without compensation High business confidence and investment growth Promotes fiscal consolidation Low debt ratios Subdued inflation Favorable weather conditions Rapid transition from fossil fuels to renewables Strong global growth Risky environment Commodity boom Rapid credit rating upgrades to investment grade Very short greylisting
Upside down
Probability: 1% (from 4%) Edge Movement: Strong Q1, averaging R17.00, heading to R17.20 in Q2, R17.40 in Q3 and R16.90 in Q4. Conditions: Economic growth averages 3.3% over five years, rising to 5.0% at the end of the period Rising confidence and investment levels Structural constraints removed Strong global growth Risk-on markets Strong property rights, no nationalization or land expropriation without compensation Low domestic inflation Favorable weather Increased privatization Credit rating upgrades Substantial transition to renewable energy from fossil fuels Graylisted for less than 18 months Credit rating upgrades due to fiscal consolidation Lower loans
Baseline
Probability: 48% Edge movement: first quarter average R17.80, heading to R18.40 in Q2, R18.60 in Q3 and down to R17.80 in Q4. Conditions: Modest economic growth averaging 1.9% over five years, rising to 3.0% by the end of the period Neutral to positive risk sentiment in global markets Fiscal consolidation in South Africa leads to positive sentiment Likely higher credit rating Stable rand, somewhat stronger Inflation influenced by weather patterns – via food price inflation Slow phase-out of fossil fuels Russia/Ukraine conflict eases and does not worsen Little expropriation without compensation Temporary greylisting Debt/GDP stabilization leads to positive outlook Credit rating upgrades
Lite disadvantage
Probability: 40% (from 36%) Edge movement: Weak Q1, averaging R18.00, heading for R18.90 in Q2, R19.00 in Q3 and R18.60 in Q4. Conditions: Weak GDP growth averaging 0.9% over five years Shift to leftist policies Depressed business confidence Substantial load and water shedding Very weak rail capacity Civil and political unrest Low investment growth Recession Some expropriation of private sector properties without compensation High inflation Unfavorable weather conditions Marked edge weakness Little transition to renewable energy sources away from fossil fuels Long-term greylisted More government bonds Risk of credit rating downgrades happening at a later date
Serious disadvantage
Probability: 10% (from 11%) Edge Movement: Weak Q1, averaging R18.70, heading for R19.30 in Q2, R19.70 in Q3 and R20.00 in Q4. Circumstances: Prolonged global recession and global financial crisis ANC/EFF coalition in 2024 Widespread, severe load shearing Severe political and civil unrest Increased government borrowing from broad sources No transition to renewable energy from fossil fuels Very high inflation Severe adverse weather conditions Severe edge weakness Expropriation of private property property without compensation Blacklisted Credit rating downgraded (B rating, eventually to CCC) Increased default risk Sink deeper into a debt trap
Read: South Africa is in trouble
