South Africa follows in Fed's footsteps
Head of Macro Analysis
Summary: The macro story behind the SARB rate hike remains a troubled one on multiple fronts.
This certainly indicates that the status quo will likely remain in place at upcoming meetings until more data are available on the evolution of the rand and inflation.
Though the market was surprised by the decision, traders investing in South African assets know very well that the SARB tends to follow the Federal Reserve's monetary policy, as we can see in the chart below. It was only a matter of time before the SARB decide to hike rates.
1. The agrarian reform that should be formally implemented next year has a negative knock-on effect on investors which should limit the potential of a rebound in growth.
2. The mining sector, which is an integral part of South Africa’s economy, is in bad shape. The country’s gold production has been declining since November 2017 and recently reached its lowest level since January 2015 (-20% year-on-year).
3. The country remains ill-prepared to face the consequences of high political risk and a strong USD. Its current account deficit has narrowed since 2014 but still stands at 3.2% of GDP and it does not have enough currency reserves to defend the rand against speculation. South Africa’s reserves represent the equivalent of five months’ worth of imports.