The Rand and the US Fed Interest Hike

South Africa has just come out of one of the most turbulent times since the dawn of democracy.
 
The firing of Nhlanhla Nene (Finance Minister) and his replacement by the little known David van Rooyen has rallied South Africans leading to the nationwide "#Zuma must fall" protests on reconciliation day and downgrading of South Africa by the rating agency Moody which followed a similar fate on the big four banks. Moody's still perceives South Africa in a negative way but two notches above junk status.  Thank God common sense prevailed and Pravin Gordhan made a welcome return and sanity finally prevailed in the markets.

This scenario underlined the sensitivity of emerging markets in this new world order, and the US Fed lived up to a properly managed example of new policy implementations. With the US economy in a much better shape it had become an open secret that the Fed will increase interest rates in its next sitting. At the end of the meeting when Janet Yellen the Fed Chairperson announced 25 basis points increase, the markets had already factored in that decision and no surprises were in store.

We expect that three more increases will be effected in the US in 2016 with the first one being in April 2016. However, it is the impact of these developments on the local market and specifically on the rand that are of interest. The Rand has already lost over the 20% of its value to the US dollar and other major currencies. As an emerging market, the hike in the US interest rates would result in capital outflows to the US which is deemed a stable investment destination a phenomenon aptly dubbed flight to safety/quality economics. All this happens at a time when South Africa is in dire need of capital inflows to tackle high unemployment of over 25%.

Such a depressing cocktail is likely to inflict more misery to the SA economy. Unfortunately the outflows began with the finance minister debacle. By the time of the hike, the bloodbath on the local financial markets had taken place resulting in unprecedented records. The Rand  briefly traded at record highs of R16 against the US dollar, investors dumped local shares  with the JSE recording more than double its average daily trading and R161 billion was wiped off the market in those four days.

Looking ahead, 2016 will be a challenging time for South Africa as the country needs to reignite economic growth which has been a major nightmare for this administration. The economy has to grow to be able to address unemployment and as quoted by the rating agencies fiscal discipline and prudent policy coordination is a currently a challenge, yet it is a critical ingredient in this endeavour.

Oil prices have remained depressed but SA may not benefit due to a weaker Rand. Forecasts are that they will remain depressed putting more pressure on emerging markets and the gulf nations who are likely to face recessions in 2016. The outlook for 2016 is not rosy for South Africa and the country needs to dig deep, buckle up  and reign in on the wastage(irregular government spending), public debt and stabilise macro-economic fundamentals.