Since the onset of the pandemic, fears have been increasing about the solvency of emerging markets. Significant outflows of capital have occurred in recent months as markets enter a “risk-off” setting focusing on the US election result. This has put a spotlight on the risks of sovereign and currency crises in some of the countries worst hit by the pandemic, and none more so than South Africa. Whilst it is hard to pinpoint when the pandemic began to be reflected in financial markets, the USDZAR has depreciated 8 per cent since the beginning of March to reach 16.6 on 2 September 2020. Although the currency has fallen in value over this period, much of the fall occurred during the early months of the pandemic when investors were scrambling for dollar liquidity. Since June, the currency pair has been less volatile, moving in a range between 16 and 18.
Refresh this chart in your browser | Edit the chart in Datastream
According to Fathom Consulting’s Financial Vulnerability Indicator (FVI), the risks to the South African economy are relatively moderate in a historical context. Historically, most sovereign and currency crises have been preceded by a build-up of imbalances that make a country vulnerable to outflows of capital. In South Africa, the current account balance is less negative just now than has been seen in recent history, which reduces the risk of a currency and sovereign crisis.
Refresh this chart in your browser | Edit the chart in Datastream
Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in Refinitiv Eikon.
In addition, the rand’s real effective exchange rate does not appear overvalued, and therefore does not appear to be creating a vulnerability to a currency crisis.
Refresh this chart in your browser | Edit the chart in Datastream
Although imbalances are at a low level at present, they have begun to build as the government budget moves further into deficit than it has been historically. We find that this is an important imbalance when predicting currency crises, but less important than the current account.
Refresh this chart in your browser | Edit the chart in Datastream
Long-term government bond yields picked up after the onset of the pandemic, but these have returned closer to normal levels. This has been supported by the policy actions of the South African Reserve Bank, which became one of several emerging market central banks to experiment with quantitative easing. There is little evidence yet that investors are losing faith in the government’s ability to repay, or in the value of the South African rand.
To learn more about Fathom’s FVI and the risks of sovereign, currency and banking crises contact Fathom’s Technical Director, Andrea Zazzarelli, at andrea.zazzarelli@fathom-consulting.com.
Refresh this chart in your browser | Edit the chart in Datastream
________________________________________________________________________________________
Refinitiv Datastream
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.
Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
