The South African rand is “treading water”, says Investec chief economist Annabel Bishop, stuck between more positive global conditions and little in the way of progress on the domestic front.
On Tuesday morning (10 January), the local unit held its ground just above R17.00 to the dollar, not making any significant gains or losses in the markets.
The currency is stronger than the R17.50 readings last week but still weaker than the R16.80 reading at the start of the year.
This stasis is being driven by two competing forces: a softer dollar as market risk aversion pulls back somewhat from the end of last week’s US labour market figures – benefitting emerging markets including the rand – and a flat January 8 statement from the ANC, promising developments and progress on the local economic and governance front, but little to show for it.
“The ANC 8th January policy statement released after its conference highlighted the need to repair infrastructure, improve SOEs, re-industrialise and improve education, among other objectives,” Bishop said.
“However, the policy statement was met with little market reaction as implementation is expected to continue to lag on growth-enhancing reforms – such rail, ports, electricity, water etc. – and be insufficient.”
The grim reality is that South Africa has a persistently weak economic environment, with insufficient economic growth and job demand in the face of very high unemployment, the economist noted.
This is further damaged by the inability of the state monopolies, Eskom and Transnet, to meet the demand for their services.
Given this situation, even beneficial global market conditions can do little to improve local sentiment.
“Little improvement is expected this year,” Bishop said.
On a more positive note, the economist said that inflation is coming down faster than expected, with the Eurozone seeing a drop to 9.2% y/y from the prior month’s 10.1% y/y for its CPI inflation, and this week US CPI inflation is out on Wednesday (11 January).
“A drop to 6.5% y/y from 7.1% y/y is expected, down from 9.1% y/y in June last year, as energy costs and commodities prices in general waned – although US services price pressure are still rising. A higher outcome would weaken the rand further,” Bishop said.
Feeding positive sentiment in global markets, supporting a stronger rand, are a number of US data readings that came out weaker than expected last month, adding to hopes that the US would stick to a slowing rate hike trajectory, which would weaken the dollar. However, Bishop warned that volatility is still likely in the data, and so for the rand.