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Lockdown Part 2: The South African Economy and the Rand

 

December 15, 2020 (Investorideas.com Newswire) Last night, President Ramaphosa announced a long expected second lockdown. Covid-19 cases have been rising relentlessly over the last few weeks as the return of summer has led to packed beaches and restaurants. While the psychological case for the population's risky behaviour is understandable, the result will be further damage to an already battered economy and more pressure on the Rand.

With the announcement of the new restrictions, the President seems to be trying to find a balance between lowering infection rates without inflicting too much damage on the summertime economy. Alcohol sales will be prohibited in shops over the weekend, but restaurants and bars can stay open until 10pm. Large crowds and live events are cancelled, but the beaches in the Western Cape will remain open. A curfew will be in place from 11pm until 4am, but all wineries can remain open for tastings and sales - even over the weekend.

The balance is important and has been welcomed by the tourism industry. The fear had been that a second hard lockdown was in the offing, and while that may still be on the cards, the economy has dodged a mortal wounding. The first lockdown banned almost all commercial activity for five weeks and wiped out almost a decade of job gains, as a result the economy is now on track to contract the most in almost 90 years. While, the latest restrictions announced by President Cyril Ramaphosa could slow the recovery - the damage will not be as severe.

The Reserve Bank has remained cautiously optimistic, responding to queries by Bloomberg by saying that "Although [the new restrictions] might slow the pace of economic growth, and the recovery, somewhat, it might not have a specific effect on the timing of a lower turning point in the business cycle. This is because the economy has already rebounded from such a low base in the second quarter of 2020."

There are a lot of "might"s in that statement, which will obviously make many local businesses and international investors nervous. The Reserve Bank's point that the state of the economy was so poor in the second quarter certainly rings true, and any economic dampening effect from the new restrictions will not be so strongly felt as a result. But anxiety remains and will not lessen until we know how bad this second wave of Covid-19 will be. Remember, Ramphosa last addressed the nation only a short 12 days ago - will he be forced into even tighter restrictions before Christmas? It would take a brave person to bet against it.

Where next for the Rand?

The Rand has been holding up strongly in the wake of months of poor economic news, but this has mostly been down to external factors, namely a weak US Dollar in the wake of Biden's win in the US and the excellent news regarding Covid-19 vaccination efforts. Biden is likely to extend a much smaller domestic stimulus package than President Trump would have, weakening the outlook for corporate America. Biden is also seen as a steadier pair of hands than Trump, thus reducing overall risk and causing investors to shed some of their dollar holdings.

And with the Moderna, Pfizer and AstraZeneca vaccines all proving remarkably safe and effective, and all being fast-tracked for approval by governments around the world, there is finally light at the end of the pandemic tunnel. Investors who have been in a sitting on their money are looking abroad to emerging markets once again.

But can the Rand's stability last? This is unlikely. Many of the best Forex brokers in South Africa have reported a surge in support for the Rand in recently as speculators have attempted to cash-in on the Rand's rise, but long-term positional traders are still holding firm in their short positions. As traders digest the potential for further economic disruption over the summer, we are already beginning to see the Rand backsliding from its recent gains against the greenback. As investor appetite returns to normal levels and the real cost of the Covid-19 pandemic in South Africa becomes clear, the potential for further devaluation will increase.

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