Chart of the Week: Political change in South Africa leads to strong Rand appreciation

The chart of the week is from Alex Schober, Southern Cone Analyst, and William Attwell, Practice Leader for Sub-Saharan Africa:

While doing analysis on the Chilean Peso, I started to look at how other EM currencies tied to primary commodities were performing. I noticed the strong outperformance of the Rand, which sometimes trades alongside gold prices, and was surprised to see how much it had outperformed the BRICS in recent months. I wrote an email to our Practice Leader for SSA, William Attwell, who told me that most of the outperformance was due to recent political changes, which had a huge positive impact on investor sentiment. This is what William told me:

 

‘Among the BRICS, the South African Rand has strongly outperformed its peers, beginning in December 2017. This is due to a shift in market sentiment following a set of recent political changes. The ZAR is especially susceptible to fluctuations in market sentiment, which explains its positive momentum since rumors began that the ANC was contemplating the removal of Zuma starting in December. In December 2017, the African National Congress (ANC) selected Cyril Ramaphosa as Jacob Zuma’s successor as president of the party. When Zuma finally stepped down, the ZAR strengthened to three-year highs.

 

Zuma’s successor as president of South Africa – Cyril Ramaphosa – is highly respected internationally. Not only is he one of the country’s most successful black business tycoons, he was also former President Nelson Mandela’s preferred successor. Looking forward to 2018, FSG expects the ZAR to remain steady as measures taken by the Ramaphosa administration to stabilize public finances, cut graft and attract investment begin to take effect. We see South Africa recovering from several years of poor growth, with real gdp growing 1.2% (0.4% in 2017), with positive growth in investment after several years of negative investment growth. We see even better performance in 2019 and 2020, as the economy continues to recover and as Ramaphosa’s expected reforms begin to increase economic activity.’

 

So as it turned out, I was reading the data wrong – my initial thought was that ZAR appreciation had to be driven by primary commodity demand. I had to check with our regional expert to interpret that data correctly. Without applying the political insight from William, I could have easily drawn the wrong conclusion. It’s the exact reason why we combine economic and political analysis in all of our regional research.”


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