South African Rand Crumbles as Coronavirus Concerns Dominate Ahead of Weekend

- ZAR suffers punishing losses on coronavirus concerns.

- Gov confirms SA's first case as infection spreads globally.

- Risk assets melt down again ahead of weekend break.

- ZAR the weakest among emerging market currencies.

- As economy already in recession before any virus hit.

- Economic contraction lifts debt-to-GDP, threatens rating.

- GBP/ZAR comfortably above 20.0, USD/ZAR breaks 15.50.

Image © Adobe Images

- GBP/ZAR Spot Rate: 20.42 up +1..20% today

- Indicative bank rates for transfers: 19.70-19.84

- Indicative broker rates for transfers: 20.11-20.23 >> find out more about this rate.

The Rand crumbled again Friday, enabling the Pound-to-Rand rate to hit a new post-referendum high after establishing itself comfortably above the 20.0 handle, as risk markets went into meltdown mode ahead of the weekend and the South African currency suffered disproportionately. 

South Africa’s currency was the weakest of all emerging market units heading into the weekend as investors responded to signs of worsening coronavirus outbreaks in the U.S. and Europe, while also punishing the Rand after the Ministry of Health announced South Africa’s first coronavirus case on Thursday and drew questions of whether the country’s government and health service is prepared to manage a local outbreak. 

“The patient is a 38-year-old male who travelled to Italy with his wife. They were part of a group of 10 people and they arrived back in South Africa on March 1, 2020,” the Ministry said Thursday. “The patient has been self-isolating since March 3...The doctor has been self-isolated as well.”

Rand losses came amid broad weakness in stock markets and steep declines for oil  in spite of reports of an Organization of Petroleum Exporting Countries (OPEC) cartel agreement to game prices higher. Investors have sold risk assets ahead of a weekend that could bring further adverse virus developments.

The U.S. Dollar and Pound Sterling were also laggards among major currencies owing to concerns about domestic outbreaks of the virus but they still got the better of South Africa’s sickly Rand, with the USD/ZAR rate clearing the 15.50 level and GBP/ZAR rising further above 20.

Coronavirus was estimated Friday to threaten a $50 bn hit to global exports as supply chains struggle amid ongoing dispruption in China. 

Above: Pound-to-South African Rand rate at weekly intervals, alongside USD/ZAR rate.

"We start the day on the back foot at R15.69/$, R17.62/€ and R20.33/£. The fallout regarding the arrival of COVID-19 in South Africa could see the rand come under further pressure, depending on the spread of the virus and the response by government. The week ahead will see a continuation off risk-averse behaviour. We are biased towards a weak rand, and additional sell-offs, with the rand likely to move towards the next key level of R15.80," says Bianca Botes, a treasury partner at Peregrine Treasury Solutions. 

Sterling has consistently ranked among the worst performers in coronavirus-related sell-offs but it's not clear if that results from lingering concerns about the Brexit pathway or if it has more to do with flows moving in and out of the City, where assets under management are more than three times GDP.

Some of the world's largest banks were reported Thursday and Friday to have activated contingency plans in London's financial district of Canary Wharf after a research analyst at one firm was found to have the coronavirus, the first sign of disruption to operations in one of the world's major financial centres. Reports came as the virus appeared to be spreading with increased momentum outside the four major hotspots that are China, South Korea, Italy and Iran.

“The National Institute of Communicable Disease (NICD) has assured the public of no immediate risk. That doesn’t imply that there aren’t any risks at all! South Africa’s healthcare industry will be hard pressed to ensure that adequate measures are being assumed to contain its spread given that a treatment or vaccine remains elusive,” warns Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank. “Emerging markets are once again on the back foot, with the rand’s opening levels against the greenback flipping from 15.26 to 15.62. A bizarre turn of events, but not unique to SA. The local unit continues to drift higher this morning, with 15.80 a likely target.”

Above: Pound-to-South African Rand rate at weekly intervals, alongside USD/ZAR rate.

Coronavirus has landed on South African shores, in the coastal area of KwaZulu-Natal, just as the economy has entered its second technical recession in as many years and as it faces the prospect of a three-quarter long contraction given seasonal weakness in the first quarter of each year. And now, South Africa faces economic risk from measures that may be taken by the government and citizens in order to contain the virus. 

South Africa’s economy has fallen into recession as Moody’s digests the government’s 2020 budget plan, which showed the deficit and debt-to-GDP ratio remaining on unsustainable paths and failed to dispel market expectations of a damaging credit rating downgrade to ‘junk.’ And given the economy now risks a deeper contraction that would automatically lift the debt-to-GDP ratio, markets are increasingly expecting the South African Reserve Bank (SARB) to cut interest rates, another risk to the Rand.

Some analysts say Moody’s may wait until November before stripping away South Africa’s last remaining investment grade credit rating but many increasingly expect that a downgrade will come sooner or later. That would see some fund managers who already hold South African bonds automatically prevented from owning them and as a result, forced into selling their holdings, potentially leading to large outflows from the Rand.

"We continue to believe that it will be a very close call whether Moody’s downgrades SA’s credit rating on 27th March, but marginally lean towards the chance of no downgrade," says Annabel Bishop, chief economist at Investec. "South Africa’s FRA curve continues to factor in close to 50bp worth of cuts in the repo rate for this year.  We now expect a 25bp cut in the repo rate at the May MPC meeting."