The South African Rand started 2020 in negative territory. Analysts were expecting the currency to retreat as much as 4% in the first quarter and 10% by year-end. What has transpired can only be described as a nightmare with the currency losing 18% year to date. The analysts’ projections were due to an expected failure for the government to make the necessary budget cuts and then limited effects of the Covid 19 pandemic.
South Africa to date has recorded 274 cases of Covid 19 with the bulk of transmissions being of foreign origin. As the pandemic spreads investors are looking to safe-haven assets and capital is moving away from riskier assets and economies. To underscore this point I’ve collected charts for Brazilian Real, Russian Ruble, Indian Rupee and Chinese Yuan. All charts are 1-year charts. Each chart clearly shows that the respective currencies and Rand had a mild correlation prior to February 2020. As the pandemic took hold of the world in 2020 all currencies share a similar sharp decline against the US dollar. With gold still one of the best safe-haven assets it has seen a resurgence lately.
South Africa was on a mission to cut its budget deficit in order to save its economy’s rating. Moody’s, which is reviewing South Africa’s Baa3 international credit rating next month expected the government will find it hard to achieve spending cuts mooted in the budget, which include a reduction in the wage bill that’s opposed by labour unions. Finance Minister Tito Mboweni said government debt will continue to climb even with the spending cuts as weak economic growth curbs tax collections.
Analysts had expected a bad March for the South African Rand after posting losses in both January and February. The Rand has recorded March losses 4 of the last 5 years prior and analysts expected a decline. With the government currently navigating these tricky waters trying to avoid a lockdown as it will have dire consequences for an already fragile economy. As the African continent is only experiencing the start of its experiences with the Covid 19 pandemic the way forward or how long the waters will be choppy is unclear at present. Zimbabwe confirmed its first two cases over the weekend.