Published: June 29th, 2022
The latest economic data paints a brighter picture for South Africa’s economy than markets had expected, strengthening a favourable policy outlook for the Rand by the South African Reserve Bank (SARB).
At the start of this week’s session ZAR had notched up noteworthy gains over many of its G20 currency group peers, echoing the positive performance seen across late May and early June. Earlier this month ZAR topped the G20 league table for the 2022 year-to-date before receiving another boost from better-than-expected economic growth figures that seemed to take forex traders by surprise.
In a note to investors, currency analysts at Investec wrote that 'the upbeat GDP figures for the first quarter of 2022 have piled on more pressure for higher South African interest rates. A 50 basis-points hike at the SARB’s July policy meeting appears more likely now than a 25 basis-points rise.
‘In our view the central bank’s Monetary Policy Committee (MPC) is likely to push up the repo rate by 100 basis points in total for the second half of the year across its July and September meetings. ZAR would find itself under marked pressure if the SARB allows a differential to narrow between South African and American interest rates.”
Figures from Statistics South Africa show that the continent’s southernmost national economy expanded at an annualised rate of three per cent in the first quarter of the year. That confounded economic consensus that had been looking for a growth rate of 1.7 per cent, which would have been essentially unchanged from Q4 2021.
The numbers followed other figures released the previous week (wc 20th June) that indicated falling unemployment in the labour market in the same period. It was the first time South African joblessness numbers had fallen since the start of the COVID-19 pandemic.
Markets will now be watching for mining production and manufacturing figures that due out next week, which should deliver a sneek-peek at the pace of growth key domestic industries have posted for the opening months of Q2 2022.
The Emerging Markets Forex unit at Commerzbank wrote in a market analysis that 'improving market sentiment and waning strength in the Greenback mean ZAR has recovered significantly from its mid-May doldrums. These latest GDP figures are providing added support.’
Commerzbank analysts warn however that despite positive first quarter data, the flooding seen in Kwa-Zulu Natal province in May and the recent bout of load-shedding from national power utility Eskom might be enough to cool economic growth in Q2.
Those sentiments were echoed by Investec analysts, who wrote that the Bureau for Economic Research’s (BER) Q2 business confidence index might deliver a more accurate and complete picture of about the South African economy’s real performance during the three months to the end of June.
Investec analysts also say that ZAR has benefited this year from rising global commodity prices. When blended with a stable domestic economy, the two factors have combined to give offshore investors healthy returns. They do warn that higher oil prices will keep the Rand under pressure, particularly if the next round of economic data show slowing GDP growth in the second quarter.
‘ZAR has benefitted from a large trade and current account surplus over the past two years. It’s possible that could shrink or even reverse in the coming quarters.’
The bank says Rand had appreciated in value by 6.2 per cent for the year-to-date against the currencies of its largest trading partners. Those gains also caught some investors off guard since ZAR is considered a 'high beta' currency that tends to depreciate when geopolitical anxiety (for example, the Ukraine crisis) rises.
Investors have certainly been unsettled by Russia's ongoing military action, however Rand has attracted support due to rising demand for alternative sources of raw materials, boosting its commodity exports.
Investec wrote that a surge in metal prices has been a key driver for Rand across Q1, as worries about sanctions on Russian commodity exports push prices up amid fears about lack of supply.
Other antipodean commodity currencies like the Australian (AUD) and New Zealand (NZD) dollars have also benefitted. Like Rand, they tend to depreciate when global investors get market jitters. All are attracting new levels of support thanks to the extended bout of geopolitical and supply chain disruption.
Recent figures from The Institute of International Finance’s (IIF) database shows that foreign investors have been selling off their emerging market positions since the Ukraine conflict began. However South Africa has been largely immune to the effect, with equity markets actually seeing a net inflow of foreign money.
Commerzbank analysts say South Africa has been attractive to investors looking to sustain some emerging markets exposure thanks to its relative economic stability, deep financial markets, and affordable market valuations.
Central bank policy from the SARB has also been Rand supportive, with steady interest rate hikes in line with growth figures and rising returns on assets like Rand-backed bonds.
The SARB raised the interest rate for a second time in January to four per cent. However, money markets are currently pricing in repo rate rises totalling 100 basis points by the Autumn.
The bank notes that such expectations could turn out to be overheated, with the potebtial risk that some will see losses if fewer hikes actually come to fruition.
Investec analysts also flagged the potential downside risks, adding that global risk appetite is likely to remain fragile until the Ukraine crisis ends. Investors will be expected to balance their portfolios in response to rising inflation, supply chain problems, and rising interest rates as well. A flight to safety could scupper even the most caveated forecasts.
'The turmoil and unexpected knock-on effects caused by sanctions on Russia have stoked risk-off sentiment in Q1 and the trend will likely persist, if not intensify. That blurs the outlook for global growth. The rate-raising path currently being followed by the by the US Fed will also test risk appetites through the second half of 2022’.