South African Rand (ZAR) Exchange Rates Slump as Worries Over Economic Outlook Increase
In the wake of a discouraging South African budget, which further dampened confidence in the economic outlook, the mood towards the South African Rand (ZAR) has deteriorated markedly.
Investors piled out of the Rand on Wednesday after new Finance Minister Tito Mboweni cut growth forecasts and warned of wider budget deficits to come
With the South African economy at increasing risk thanks to high debt levels and a lack of growth momentum ZAR exchange rates look set to remain biased to the downside for some time to come.
The more pessimistic nature of the budget also heightened fears that South Africa could lose its only remaining investment grade credit rating if ratings agency Moody’s is prompted to downgrade.
As wider market risk appetite remains limited thanks to a stronger US Dollar (USD) and global geopolitical worries support for the South African Rand appears limited.
UK Budget Announcement Unlikely to Offer Pound Sterling (GBP) Exchange Rate Boost
The unveiling of the latest UK budget is unlikely to give the Pound Sterling to South African Rand (GBP/ZAR) exchange rate a boost on Monday, however.
While improved UK finances have created some scope for Chancellor Philip Hammond to increase spending the chances of this budget delivering the ‘end of austerity’ appear slim.
Given the high degree of Brexit-based uncertainty that continues to hang over the economic outlook Hammond could opt to take a more cautious approach.
As Tim Riddell, research analyst at Westpac, commented:
‘Although revenue is beating forecasts, several welfare initiatives, including more NHS funding, need to be financed. Chancellor Hammond also needs to hold funds against Brexit disruption while attempting to maintain projections for fiscal improvements made earlier this year.’
Either way, political pressures are likely to continue weighing on Pound Sterling (GBP) for the foreseeable future.
With Theresa May still struggling to stir up support for her Brexit plans the threat of a potential leadership challenge remains, to the detriment of GBP exchange rates.
South African Rand (ZAR) Vulnerable to Weaker Trade and Unemployment Figures
Confidence in the South African Rand may deteriorate further in the coming week, though, with the release of the third quarter unemployment rate and September’s trade balance.
Any fresh signs of weakness within the South African economy is likely to encourage further ZAR exchange rate losses.
Forecasts point towards the trade surplus narrowing from 8.8 billion to 5 billion on the month, highlighting South Africa’s weakening financial position.
With global trade under pressure from increasing US protectionism and the US-China trade spat further narrowing looks likely in the months ahead.
As a result, any deterioration here could give the GBP/ZAR exchange rate an extra boost, especially if the balance falls into a state of deficit.
Any increase in the South African unemployment rate may also drive the South African Rand lower across the board.