South African Rand on Front Foot After Reforms Win Approval and Trade Outlook Brightens

Image © Government of South Africa, reproduced under CC licensing

- New economic reforms support ZAR

- Hopes of U.S - China trade deal also support

- Rand ends week stronger as a result

The hard-hit South African Rand was granted two lifelines this week that sees it approach the weekend on the front foot, outperforming all the major G10 currencies, bar the British Pound which is enjoying a bout of strength owing to improving sentiment regarding Brexit.

The first was a controversial economic reform package and the second a possible improvement in the global trade backdrop, to which the Rand can be especially sensitive.

The economic reform package includes free-market friendly policies such as the privatisation of state-owned companies which do not serve a developmental purpose, the sale of utility giant Eskom’s coal-fired power-stations, the exclusion of small and medium-sized companies from adhering to the national minimum wage, and a simplification of the work permit and visa application process for foreign workers.

The reforms are the brainchild of finance minister Tito Mboweni and they got the ‘thumbs up’ from President Cyril Ramaphosa when he chaired the first meeting of a new 18-member economic advisory council at Tuynhuys in Cape Town, on Wednesday.

His backing of the plan led to a rally in the Rand as markets approved.

Yet supporting the packages will put him on a collision course with some far left elements of the government who are against the reforms.

These include the ANC’s alliance partners, the SA Communist Party and trade union federation Cosatu, who were largely responsible for Ramaphosa’s election victory. Thus Ramaphosa risks political self-harm with his support of Mboweni’s reforms.

A second factor supporting the Rand was a more optimistic outlook for U.S-China trade talks, which started on Thursday and appeared to be going well at the time of writing.

Experts now consider the incentives high for both sides to agree some sort of a deal.

“The chances of a small deal are quite high,” says Dennis Yang, a professor at Virginia State University’s Darden School of Business, adding:

"This is probably Trump’s last chance to reach an agreement before the up-and-coming 2020 elections. On the U.S. side the clock is ticking, and pending tariffs will hurt consumers, and are another factor that could push the U.S. economy into recession. And on the Chinese side the pending tariffs will hurt Chinese companies more than earlier tariffs. The earlier tariffs caused more damage to multinationals and joint venture firms. So each side has walked away more than once before, they have seen each other’s cards, and they know each other’s bottom line; but this time, hopefully, both sides have strong incentives to reach a deal."

A small trade deal would provide support to the slowing global economy which would help emerging market economies and their currencies, such as the Rand.

The Rand has had a strong week on the back of the aforesaid developments, rising 1.26% versus the Dollar to 14.80. It has fared less well against the Pound, falling 1.14% due to renewed hopes of a Brexit deal.

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