Pound Sterling South African Rand (GBP/ZAR) Exchange Rate Rallies as ‘No Way’ ZA Can ‘Escape a Downgrade’
UPDATE 30/10/19: The Pound Sterling South African Rand (GBP/ZAR) exchange rate jumped around 2.7% on Wednesday, leaving the pairing trading at around R19.2961.
The South African Rand suffered its steepest fall in over a year today, as Finance Minister Tito Mboweni expects wider budget deficits and a high increase in debt during his medium-term budget.
The Treasury predicted the budget deficit was likely to rise to 5.9% of GDP this fiscal year, far higher than the previous estimate of 4.5%.
This would be the highest since 2009/2010 and is likely to spark concerns that South Africa could lose its only remaining investment-grade rating from Moody’s, which is due to be reviewed on Friday.
Commenting on this, head of emerging markets strategy at TD Securities, Cristian Maggio said:
‘From a ratings agency point of view the debt is unsustainable.
‘There is no way that South Africa can escape a downgrade. It may not happen immediately, it may take some time because ratings agencies follow certain procedures, but it will happen.’
Pound Sterling South African Rand (GBP/ZAR) Exchange Rate Rises Ahead of US Fed Rate Decision
The Pound Sterling South African Rand (GBP/ZAR) exchange rate rallied this morning, leaving the pairing trading at around R18.8295.
The South African Rand slumped on Tuesday as attention turned to the South Africa unemployment rate which edged up to 29.1% in the third quarter, its best level in more than a decade.
Meanwhile, earlier this morning the Rand edged up as markets priced in a rate cut from the US Federal Reserve. This outweighed fears that the local budget would reveal deeper debt and wider government deficits.
South African Finance Minister, Tito Mboweni is due to deliver the much-awaited medium-term budget on Wednesday, which is expected to show higher debt and lower growth projections.
Added to this, the budget is predicted to reveal a wider budget deficit than February’s estimate.
However, investors have continued to buy the local currency because of the likelihood of a US Fed rate cut.
Commenting on this, analysts at Nedbank wrote in a note:
‘The MTBPS [budget] may turn out to be a non-event for the FX and bond markets. This is because globally, the focus will likely be on the US Fed’s FOMC meeting.’
Sterling (GBP) Rises as PM Pushes for General Election
Sterling was trending higher against the Rand on Tuesday as investors awaited Prime Minister Boris Johnson’s next attempt to push for an early general election before the end of the year.
Boris Johnson is now expected to force a bill through parliament requiring only a majority of 320 MPs rather than the two-thirds majority the PM was unable to secure on Monday.
It is expected that if the bill is passed, GBP will strengthen and this could unlock further gains as this would mean Johnson’s Brexit deal is likely to be passed more easily, although the long-term outlook will be dependent on the election results.
Commenting on this, MUFG currency analyst, Lee Hardman said:
‘The expectation is that [Johnson] should be able to get the vote passed in Parliament today for an early election.
‘From our perspective it’s difficult to see where the obvious downside risk for the Pound is.
‘We don’t see the no-deal risk going back to the table any time soon. Even if the government doesn’t do as well [in the election], that would increase the influence of the opposition parties who want an even softer deal.’
South African Rand (ZAR) Falls despite US-China Optimism
The risk-sensitive South African Rand received an upswing of support from geo-trade optimism triggered by the latest US China trade war news.
However, a weak South African unemployment rate weighed on the currency, limiting any gains.
Risk sentiment increased as hopes increased for an easing of US-China tensions after US President Donald Trump said Phase One of the deal was ‘ahead of schedule’.
Speaking at the start of the week, the US President stated:
‘We are looking probably ahead of schedule to sign a very big portion of the China deal, and we’ll call it phase one but it’s a very big portion.
‘So we’re about, I would say, a little bit ahead of schedule, maybe a lot ahead of schedule. Probably we’ll sign it.’
Pound South African Rand Outlook: Will Further Brexit Uncertainty Weigh on GBP?
Looking ahead to Wednesday, South African Finance Minister, Tito Mboweni’s economic plan will be implemented in a medium-term budget which may have little effect on the South African Rand (ZAR) as investors await the US Federal Reserve rate cut.
Meanwhile, Brexit is likely to cause further movement in Sterling (GBP) as Boris Johnson makes a fresh bid for a December general election.
If the Prime Minister can secure an early general election, this could provide the Pound with a temporary upswing of support. However, Commerzbank analyst Thu Lan Nguyen argues this could also create the risk of constant postponement of Brexit, causing the Pound South African Rand (GBP/ZAR) exchange rate to slump over the long-term.