April 03, 2020
Market News 3 April 2020
What we know
Well done, you’ve made it! One week down and another how many to go? Although the date for the lock-down to end remains at 16 April for now, lessons from other parts of the world suggest that an extension would be very likely indeed.
We started the week not only in lock-down, but with confirmation that our sovereign debt is now officially classified as junk. After months of trying to get our heads around whether Moody’s would or wouldn’t, by the time we had to make a call last Friday, given all that has transpired in the past few months, we said that we had moved “towards a view that they simply have no choice (but to downgrade us)”. At the same time we suggested that “given the sell-off of the past month it may be that further weakness is actually fairly muted. Perhaps it is best that we get the downgrade behind us now?”.
We do believe that the reaction to the downgrade itself did indicate it had largely been discounted, as the initial reaction saw us lose between 2% – 4% against the big three, and we then spent Monday through Wednesday consolidating between 17.80 – 18.00 against the USD, 22.00 – 22.40 against the GBP and 19.50 – 20.00 against the EUR.
What we’ve seen in over the past 24 – 48 hours, however, has been a completely different story, as we’ve reached highs of 18.84, 23.18 and 20.38 against the USD, GBP and EUR respectively. While we are not alone in the sell-off as other emerging currencies all trade weaker, we think the most recent leg of this sell-off can be fairly confidently attributed to two things:
1) Our question in Monday’s note about how “South Africa can make an economic recovery, whilst fighting fires on so many fronts: stagnant economic growth, faltering infrastructure, troubled SOE’s, massive levels of debt and unsustainable levels of unemployment. How these issues are addressed under the specter of COVID-19 becomes an almost unfathomable question?” We also suggested that seeking help from the World Bank and IMF seems unavoidable. While this may not be the simplest course of action to pursue politically, we are heartened by Tito Mboweni making the right noises in this regard and do believe it would probably be the best result for the country right now.
2) The way in which the first week of lock-down has played out across the country. While the country seemed largely united behind the lock-down decision initially, it has quickly become apparent that this is going to be difficult to enforce logistically (in terms of security forces monitoring, service delivery and health services) and ethically – it has quickly become apparent that while the middle- and upper-class need to deal with “First World problems” (boredom, isolation, challenges shopping, etc.) helping the vast majority deal with social distancing, basic sanitation, loss of work, food and medical supplies is far more urgent, important and challenging. Which brings us back to the very first line of this article, questioning whether three weeks will prove to be anywhere near sufficient.
It has been nothing short of distressing to witness some of the events of the week – be it the scenes of looting at grocery stores, police and soldiers using excessive force (3 charges of murder have already been made against the police) the homeless being pushed into temporary accommodation so unfit that some felt the need to escape, or people begging to be allowed out in order to earn a living for their families. It has been unsettling indeed, and can only make one question, whether are we equipped to tackle this issue with the efficiency it requires.
And unfortunately, while we do need to beat this thing as soon as possible, it does remain a relative game: the further behind the rest of the World we fall in getting the virus under control, the longer our economy and currency will suffer.
What others say
30 March 2020
BusinessMaverick – South Africa ‘headed into a deep structural depression’ – Busa
“In reports on Sunday, Finance Minister Tito Mboweni said South Africa would use all levers and may turn to emergency funding and balance of payment support being opened by the World Bank and the IMF. Mboweni also told City Press that he was surprised by the Moody’s downgrade as meetings with the agency in March had suggested to him that it may not move.”
31 March 2020
Moneyweb – Here is how much a downgrade to junk will cost South Africa
“Passive funds following the WGBI will have to dump rand bonds once they’re excluded. South Africa has a 0.45% weighting in the main index, suggesting there could be roughly $14 billion of passive money holding rand government bonds. But it’s impossible to tell accurately since funds can be under- or overweight South Africa, which is the highest-yielding member of the WGBI.”
1 April 2020
Reuters – South Africa should seek IMF funding to deal with pandemic: IIF
“The recommendation is not likely to be well received in South Africa, where Finance Minister Tito Mboweni on Sunday said the country would only consider approaching the IMF as a last resort to help fight the virus.”
2 April 2020
Bloomberg – How to read Friday’s U.S. jobs data and beyond for virus impact
“Nearly 10 million jobless claims have been filed in the past two weeks as government-mandated shutdowns to contain the coronavirus force companies large and small, and industries from restaurants to manufacturers, to close their doors.”
3 April 2020
Business Maverick – More pain for Eskom as electricity demand plummets
“Eskom is already in a position where revenue generated cannot meet operating expenses and interest on its debt. Any decrease in sales will further eviscerate its cash flow position and accelerate the death spiral it is in.”
What we think
Last week we wrote that “for the past few weeks we’ve been reluctant to forecast weekly ZAR ranges, simply because to do so with any degree of confidence would require the ranges themselves to be so wide as to be of little use to anyone”.
While will still struggle to see how one could confidently place an upper end on any short- to medium-term ranges, we now firmly believe that the chance of a recovery back to levels pre-Corona is very slim. As we wrote on Monday “we expect that we should settle around 18.00 to the USD in the near-term, where-after it will again be a case of strengthening/ weakening in accordance with general risk appetite and global developments.” While the extent of potential further weakness is hard to call, we unfortunately believe that even with a hard, slow turnaround, this is the new reality and a ZAR recovery below 16.00 seems a long, long way off. Over the next 6 – 12 months, and possibly beyond, we feel that the new normal will become 16.00 – 18.00 vs the USD.
Clients therefore need to resist looking back at previous targets and rates to which we’ve all become accustomed, and rather make their forex decisions with fresh eyes, whilst keeping in mind what they wish to achieve.
Our range for the week ahead is 18.00 – 19.00.
Have a great weekend!