Rand decline 'more complicated than domestic issues'

Article by Khulekani Magubane, Fin24.

The reason for the decline of the rand on global currency markets may have more to do with external than domestic factors that many would blame for its weak performance in the week that was.

This is according to Peregrine Treasury Solutions’ Corporate Treasury Manager Bianca Botes. When the rand fell this past week, spectators were quick to point the finger at local factors including remarks about land reform.

Botes wrote in a circular from Peregrine Treasury Solutions that emerging markets largely suffered severe blows due to the sale of riskier assets by investors. As such, she wrote, there are many factors that contributed to the emerging markets sell-off.

“The trade war has played a key role in the global economic dynamic and the effect we have witnessed on emerging markets. Initially starting as a spat between China and the US, this is now a full blown trade war filled with retaliation in terms of tariffs from countries across the globe,” said Botes.

Botes said Turkey, a key player in the emerging market sector, is the latest target with US President Donald Trump doubling tariffs on Turkish steel and aluminium imports.

“On Friday, Turkey experienced what could be classified as a currency bloodbath as the lira plummeted by over 18% bringing its 2018 losses close to 40%. Turkey is now accusing countries – the US being the most obvious subject of discussion – of engaging in economic warfare on the country following a failed coup in 2016,” Botes said.

Emerging markets have been lagging behind on the journey to stability and recovery from the economic crises of the past decade, she wrote. Turkey, South Africa and Brazil have all been victims of slow economic growth, rising government debt and poverty.

“We all owe something to someone, whether it's a lunch or a thank you note. It is no different in the market environment. Unfortunately, in the financial markets this debt is expressed in billions of dollars, and an IOU simply won't suffice,” Botes wrote.

A slowdown in manufacturing in China – a result of the trade wars and China’s move from a being producing economy to a consuming economy – impacted on emerging markets that rely on trade between the two economies.

“As China consumes over 50% of the world's hard commodities, one can see how a commodity driven country such as South Africa can feel the pinch when this number starts to decline,” she wrote.

Emerging markets, then, were the riskier element in the global economy and often bore the brunt as investors sought to protect their investments, she concluded.