In concurrence with macro research performed by Integrale Advisors two months ago, emerging markets are struggling. The rand and South African government bonds have endured their worst week since the ousting of its finance minister in March of this year. A combination of economic uneasiness and political tension causes investors to expect another credit-rating downgrade.
The implications of a weak rand include an increasing cost of imports and inflation. The 10-year Yields on the government’s benchmark rose as high as 9.3%, the highest level since June 2016.
The updates from ratings agencies S&P and Moody’s on South Africa’s debt are due in November. In the past year, both ratings agencies downgraded the government’s debt once. A further cut would see the local-currency debt fall into junk territory. This would implicate an expulsion from Citi’s widely-tracked World Government Bond Index.
The South African Reserve Bank continues to struggle against stagnant growth despite high inflation, with this development further amplifying fundamental issues. In August, the central bank employed quantitative easing through rate cuts, but the increasing inflation make it doubtful for such a measure in the future.
Political turmoil exists due to allegations that the renown Gupta family used connections with the president to influence and profit off government business.
The current Minister of Finance, Malusi Gigaba, reduced growth forecasts and issued a warning for higher than previously expected fiscal deficits until 2020.