A perfect storm hit the rand and local bonds this week as fears grew that SA was heading for full-blown junk status, while the gloves came off in the trade war between the US and China.
The rand, which breached R15.18 to the dollar, hitting an 11-month low, is by far the worst-performing emerging-market currency so far in August, losing almost 5% against the dollar as the foreign sell-off of bonds accelerated.
Consumers face further fuel price increases as a result and could miss out on lower bond repayments if the weaker currency convinces the Reserve Bank, which last month lowered the interest rate in line with its international peers, to pause the cuts it might have had planned.
Data from the Central Energy Fund for the past week shows motorists could be in for a 10c hike in the fuel price next month due to rand weakness. This is despite international oil prices declining by more than 10%.
Monex Europe market analyst Simon Harvey said the outlook for the currency has deteriorated due to Eskom's financial problems. Eskom was recently bailed out with further government funding, but Moody's said this week the capital transfers "cannot do more than stabilise the company's debt burden pending the development of a longer-term solution for the company".
Bonds were also affected by the negative sentiment. So far in August, foreigners have offloaded a further $670m (about R10bn) worth of local bonds, according to Bloomberg, bringing total sales in 2019 to $1.8bn. Last year foreigners sold R65bn worth of SA bonds. Eskom's growing debt and lack of a turnaround strategy is the primary reason for this sell-off from June, said Citadel chief economist Maarten Ackerman.
SA bonds continue to significantly underperform relative to their emerging-market peers. This sell-off is largely based on future expectations of downgrades. "The reality is investors might be leaving now, but this is to avoid capital losses should bond yields rise. They will be back," Ackerman said.
Two weeks ago Fitch Ratings revised the outlook on SA's rating to negative from stable. Moody's, the only rating agency to still rate SA as investment grade, is expected to change SA's outlook to negative from stable at its next review in November. But the rand should only have to really worry about the possibility of Moody's downgrading it to junk status in 2020, said Peter Kent, co-head of Investec's fixed income team.
Another major risk to the rand and the SA economy is the US/China trade war, with the US threatening last week to further increase tariffs on Chinese exports, which wreaked havoc on global markets on Monday.
A weaker rand may stoke inflation, though local price pressures are still expected to be contained given weak domestic demand and subdued wage settlements. Analysts do not expect further weakening of the local currency in 2019, and consumers could still see a second interest rate cut from the Bank in the coming months.
Harvey said there is still room for the Bank to cut rates by another 25 basis points this year, but this cut is more likely to take place in early 2020.
Possible lower US interest rates is the primary reason to be a little optimistic, Kent said.
On the JSE, counters with a local focus remain under severe strain.
But a strong performance by precious-metal miners, helped by the gold price breaching $1,500 an ounce for the first time since 2013, provided some support.
SA banks, which are sensitive to the rand and are seen as a proxy for local economic conditions, have lost 7.7% this year compared to gold miners, which have surged more than 80%. Fitch recently revised its outlook on SA's big five banks downwards from stable to negative in line with its revision of SA's sovereign debt outlook.
Other stocks have been hit by bad offshore investments, including Sasol, which has seen staggering cost overruns at its Lake Charles project in the US, and Woolworths, whose investment in the Australian department store David Jones has not paid off.
"It is not just the weak domestic economy .quite a few [companies] have made really bad capital allocation decisions in going offshore in response to the weak domestic environment," said Old Mutual Multi-Managers strategist Izak Odendaal.
Additional reporting by TJ Strydom
