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South Africa follows in Fed's footsteps
Christopher Dembik
Summary: The macro story behind the SARB rate hike remains a troubled one on multiple fronts.
The South African Reserve Bank surprised the market yesterday by raising its policy rate to 6.75%, mostly due to of a slight drop in inflation forecasts. This decision has been the subject of intense debate within the Monetary Policy Committee, with three members voting to raise rates and the remaining three voting to keep them on hold.
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.
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.
Our outlook for South Africa remains negative for the coming months. It is one of the most vulnerable emerging market countries for the following reasons:
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.
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.