South Africa: Politics is a major driving factor – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, suggests that one of the main driving factors for the CEEMEAs is national politics and the latest example is the South African rand, which is on track to end the last quarter as the best performing EM currency rallying 6.8% against the US dollar.

Key Quotes

“The risk that South African could be downgraded even further by ratings agencies has fallen as under Ramaphosa’s leadership the pace of urgently required structural reforms should accelerate. Ramaphosa pledged to revive weak economic growth by supporting growth and jobs. South Africa should aim for a 3% GDP growth in 2018 and an even faster pace of expansion of 5% in 2023 to create jobs, according to Ramaphosa’s ambitious economic programme. Restoring confidence amongst investors and boosting business sentiment are also high on Ramaphosa’s agenda. While Moody’s welcomed his election as the ANC leader, the rating agency also warned that “Ramaphosa’s narrow victory complicates reaching consensus and leaves room for delays.” Indeed, the ANC is deeply divided as 52% ANC delegates voted for Ramaphosa and 48% for Nkosazana Dlamini-Zuma. Three out of six top positions with the ANC will be occupied by officials who are loyal to Zuma. The balance of power could still shift in favour of Ramaphosa after his camp disputed the election of pro-Zuma’s candidate to the post of the ANC Secretary General.” 

“Ramaphosa faces a major challenge of trying to unite divided ANC party to find support for his ambitious economic reforms. Market optimism may quickly fade if Ramaphosa makes slow progress in delivering his pre-election pledges.” 

“Given that USD/ZAR is already oversold, the year-to-date low at 12.3126 set in March is likely to remain an ambitious target over the short-term horizon. In fact, a corrective squeeze higher may unfold in the coming days if momentum players close their short USD/ZAR positions – a classic “buy rumour, sell fact” market reaction.”