By Lukman Otunuga, Research Analyst at FXTM
Appetite for the Rand has taken another dive after Wednesday’s budget speech fuelled pessimistic concerns over the health of the South African economy.
There is a handful of news that investors did not like from the speech. This includes the budget deficit forecast to widen to 4.5% for the year starting April 1, which would be the widest budget deficit since the fiscal year of 2010 due to the government bailing out Eskom. Other factors that have weighed on investors’ minds are the continued narrative of a pessimistic growth outlook for South Africa, coupled with matters like rising debt and another reminder that global uncertainties will provide external headwinds that will impact growth prospects.
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All of these point towards the likelihood that investor risk premium into the Rand will remain on the fragile side of the scale. Weakening growth prospects, falling tax revenues and a rising deficit all highlight that the Rand should remain pressured by domestic risks for some time.
Another question to ask following the budget speech is what will it mean for monetary policy in South Africa? The abundance of bad news on Wednesday points out that a cautious stance should be maintained, and higher interest rates are something that the South African economy does not warrant at this time.
We see ongoing trade developments, global growth fears and China slowdown concerns not only influencing the Rand, but all emerging market currencies.
Overall, the negative reaction to the budget speech hammers the point home that investor appetite for the Rand has gone “full circle” in just a matter of weeks. It was only a week or so ago that the Rand stood as the strongest emerging market performer of 2019, but is now narrowly close to reversing all of these gains in just a week.
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