Recession drives the Rand to worst level of 2018

This week was a scary one for the ruling party, and Saffers in general.

The alarm bell went off: Technical Recession

Headlines blared with doom and gloom, worry and despair.

With the ANC just a few months off from elections, this was exactly what they did not need - along with general confusion and lack of clarity in the EWC debate, and the Rand weakening ever further over R15/$.

And that last statement is what really concerns us - as exporters, importers, investors, traders and more.

Let's review how this torrid week played out...

Key moments of the week -

  • Technical recession - what exactly does a technical recession mean, and why is it so important? When the news hit this week, there was a lot of confusion, but it slowly became clearer...
  • Moody's statement - all eyes always look to anything Moody's or S&P have to said about SA's economic situation, and this week came with a sharp retort from the credit ratings giant.
  • China debt relief - it really appears that China has adjusted its focus into investing heavily into the whole of Africa, and South Africa particularly, as a President Xi has announced more money flows from China into Africa...
  • Petrol prices - global pain has continued over the continually rising gasoline prices, due to oil prices and other instabilities in the East, as well as hurricanes hitting The Gulf.
  • ANC Stimulus package - this has become a matter of urgency as a result of the GDP results this week, and it is a question as to whether this will provide any real relief to the markets...

So, the talking point of the week: Rand Weakness

When the market hit R15.69 to the Dollar, it was shocking to take a retrospective view, and see just how far we had come in the last few months. Since February 2017, where we saw the Rand reach its best level since Feb 2015, there has been a complete turnaround.

Losses in value since:

  • 1 July 2018 - USDZAR was at 13.68 = approx 14% loss in value
  • 1 January 2018 - USDZAR was at 12.33 = approx 27% loss in value
  • 26 February 2018 - USDZAR was at 11.5089 (record level for 2018) = approx 36% loss in value




A shocking turnaround...but also not one we have never seen before. The spike we saw in January 2016 to over R17/$ was a more than 40% loss in value, from where it had been in July 2015.

But what makes this time different?

Well, it was that alarm bell we were talking about earlier of the technical recession.

This was how it all happened:

  • On Tuesday, Stats SA released figures to show that the economy had contracted 0.7% in April, May and June, and revised its growth downards for the first quarter to 2.6%, putting SA in its first recession since 2009
  • This comes just weeks after announcements that unemployment figures had risen even further over 27% (as per official figures, that is)
  • This contraction was largely due to the 29% drop in agriculture - which was said to be due to the WC drought, petrol prices and VAT hikes. But ultimately, this was most likely due to the EWC debate...!
  • On the back of this news, the Rand collapsed further, spiraling 3% weaker against the Dollar.
  • What this technical recession ultimately means, is this: The "technical" definition of a recession means that there have been two consecutive quarters of negative economic growth - this is measured by using a country's gross domestic product (GDP). However, it has not yet 'officially' been labeled as a genuine recession by institutions and government departments.
  • Until South Africa can return its GDP to positive figures, this technical recession will continue.
Finance Minister Nene came out with ideas as to how the recession can be turned around, as well as the ANC calling for the stimulus package for the economy to be implemented immediately. These points are important, but ultimately, what is hurting the Rand is the EWC debate - we say it time and time again, but investors NEED stability. Currently, there is nothing of the sort.

The Rand is what sits in the middle of this muddle, bearing the brunt of it.

The week had many more headlines, and here are just a few of them:

  • With technical recession having hit, the next worry was credit ratings. Right on cue, Moody's released a statement which only increased the worries going forward. They announced that the poor GDP will result in fiscal and monetary challenges for the economy, which could lead to a credit downgrade. When this decision would come is still not fixed, but the date could be October 12 - we will keep you posted...
  • On the back of the news of the week, the ANC effectively called "Panic Stations" by saying that they need the proposed stimulus package from Ramaphosa "immediately", in order to try get the economy back on the right track. Right now, this seems a million miles away!
  • China has yet again announced more integration and involvement with Africa, as President Xi promised debt relief, in a speech to multiple African leaders. China does appear to be placing large investment and store in Africa, and it is yet to be seen exactly what the motivation is - one thing is for sure, there is a motive, and we will see what comes out of it in the years following these major money decisions.
  • While petrol prices are still rising, the Energy Department has stepped in to lessen the pain for motorists - the original increase was expected to be for over 20c, but the Energy Department has managed to reduce that to just 4.9c!
As for the battered Rand, it held on to end the week around R15.20 to the Dollar - still a full 35c higher than where it began the week, but a little stronger than where it was midweek.

It had taken two days of battling against the strong Dollar to finally manage to break almost 50c lower than where it was from the high of the week, but there was some way to go...

...and then that was that - the week was over.



The Week Ahead (10-14 September 2018)

Well, the roller-coaster continues - over the weekend, a new story broke that Zuma and other top figures from the ANC met secretly last week to discuss a strategy to remove Cyril Ramaphosa from office...

...the ANC came out quickly to say that the report was just "shameless gossip"

But we will have to see what more comes of this.

As for the Rand, it has dealt with early trade fairly well, and is now around down below R15.20/$. As always, the next few days are going to be interesting, and we still remain in the crucial period going in to the end of the year - which just seems to be the Rand's favourite time to pull some tricks.

We will be watching it closely - and suggest you follow along with us if you have any interest or exposure in the markets, with our 14 day trial of our forecasts - just use the button below!

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To your success,
James

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