Risks remain for the rand as 2018 draws to a close, Nedbank says

Nedbank is echoing concerns raised by the South African Reserve Bank in its biannual Financial Stability Review last week, when it said that tightening financial conditions are a “medium likelihood” but potentially “high-impact” risk, which would result in a repricing of assets, exchange-rate deterioration and rising debt.

SA’s currency is particularly vulnerable to emerging-market selloffs triggered by rising borrowing costs in developed countries. Daily trading in the rand is equal to about 18% of the country’s GDP, according to Renaissance Capital. By that measure, it is the most liquid currency in the world, making it easy for traders to take bets — and offload them in a risk-off environment.

The dollar squeeze, which has seen Bloomberg’s gauge of the greenback rise 8.8% since February, may worsen in 2019, according to Moody’s Investors Service.

“Global financial conditions will continue to tighten in 2019 as monetary policy normalisation gradually proceeds in advanced economies, particularly in the US,” Moody’s analysts including Anne van Praagh, Alastair Wilson and Elena Dugg wrote in a report.

Emerging markets such as SA, which have limited scope to raise interest rates, “will remain vulnerable to spillovers” from “a likely further tightening of global liquidity”, they said.

Bloomberg