Following US president-elect Donald Trump’s “surprising” victory at the polls, Japan-based research group Nomura has said that the South African economy will be affected in the coming months on the back of a steeper US yield curve.
Nomura noted that while rand volatility through this period should prevent the South African Reserve Bank from cutting rates, further hikes were possible, depending on the Federal Open Market Committee (FOMC) reaction and if the rand was selling off more aggressively to above R15.50 against the dollar.
“Looking to the medium run for South Africa, we see foreign exchange and front-end rates being particularly hit, with duration doing a little better,” the firm stated.
Nomura added that markets were likely to focus more on domestic idiosyncratic political risk under a Trump presidency, which meant that South Africa’s domestic woes would likely be seen in a worse light. “We think currency hedging will take the brunt of the weakness with hedge levels so low.”
However, the firm pointed out that this could take a while to develop, as the initial reaction is positive for commodities and risk is standing still. It explained that greater clarity would be needed from the market on the December FOMC and the likely faster pace of FOMC hikes after that.
Meanwhile, North-West University School of Business and Governance professor Raymond Parsons noted that the negative reaction in most financial markets to Trump’s victory was “not surprising”, as the markets accepted recent voter surveys indicating that Hillary Clinton was likely to win the US presidential election.
He noted that the first consequence of a Trump presidency, which had not been anticipated by most markets, was significantly heightened global economic uncertainty.
The economic impact on an emerging economy such as South Africa will ultimately generate cross currents, the strength of which cannot yet be predicted with accuracy. “We must also take into account the new composition of the US Congress in assessing which parts of Trump's agenda will indeed be implemented,” Parsons said.
In the short term, the uncertainty arising from a Trump victory is good for the gold price, as it has already strengthened. The rand will benefit from a weaker US dollar and vice-versa, as there is a well-known reciprocal relationship between the dollar and the local currency.
Nevertheless, the coming months will inevitably be a period of renewed high volatility for the rand. All this will, he says, no doubt feature in the Reserve Bank’s monetary policy committee’s next decision on interest rates when it meets again later this month.
The course that US economic data and interest rates take over the next few months will be significant for both global economic trends and for South Africa’s growth prospects. “There will be both risks and opportunities. Once things have settled down, a Trump fiscal policy may even promote US economic growth,” Parson highlighted.
In the longer term, the question of whether Trump's strongly protectionist and inward-looking attitudes will be damaging to world trade growth and, hence, to a small open economy like South Africa’s, will be raised, he said.
“The country must also assess what new geopolitical risks may arise in the event of a more confrontational Trump foreign policy towards countries such as China or Russia, with whom [South Africa has] important economic commitments. It is, however, likely that the specific trade preferences that South Africa enjoys in the US market under the African Growth and Opportunity Act will remain intact until their sunset date in 2025, as they are enshrined in legislation and not under threat,” Parsons pointed out.
He emphasised that the latest developments in US politics stressed again why South Africa must do what is necessary to get its house in order and avert a credit rating downgrade at the end of the year.
“A bigger, stronger and better economy is what South Africa must now be securing by addressing its vulnerabilities. Junk status will complicate the new challenges faced by the country,” Parsons said.
Given the heightened uncertainties in terms of global economic outlook, South Africa needed to reduce domestic policy uncertainty by urgently implementing the necessary structural reforms and improving its growth prospects as soon as possible, he urged.