MW South African assets rally on risk appetite, but there are plenty of worries for their future

By Anneken Tappe, MarketWatch

South Africa's rand outperformed other emerging market currencies against the U.S. dollar on Wednesday thanks to improving risk appetite, but there are plenty reasons to be cautious.

The rand rallied ahead of its emerging market peers versus the buck, with one dollar last buying 13.9030 rand, down 1.4%. Over the past three months, the dollar has slipped 3.5% against the rand, but in the year-to-date its still up against it by more than 12%, according to FactSet.

So what's going on?

South Africa's assets weren't spared during the emerging markets selloff (http://www.marketwatch.com/story/heres-why-south-africa-could-become-the-next-emerging-market-carnage-2018-06-08) in the summer, shining a bright spotlight on its already weak economy. In the second quarter, the country slipped into a recession (http://www.marketwatch.com/story/south-africas-unexpected-recession-adds-to-downbeat-emerging-markets-backdrop-2018-09-04), and last month Finance Minister Tito Mboweni downgraded the economic forecast (http://www.marketwatch.com/story/south-african-rand-leads-currency-losers-after-economic-outlook-downgrade-2018-10-24).

See:Why emerging markets haven't really recovered since the summer selloff (http://www.marketwatch.com/story/why-emerging-markets-havent-really-recovered-since-the-summer-selloff-2018-10-31)

As an exporter of many commodities, but a net oil importer, South Africa is at the mercy of global growth and swings in commodity prices. As market folks downgrade their outlook for the world economy, things might get scary for Johannesburg.

October's consumer price inflation soared to a one-year higher of 5.1% year-over-year Wednesday, marking the fourth month in a row that CPI exceeds the midpoint of the South African Reserve Bank's target range of 3%-6%. And this tale is far from over.

SARB already voiced concerns about rising inflation, but the rand's weakness this year has helped suggest the only way is up. The central bank could raise interest rates on Thursday, from 6.5% to 6.75%, to stem the inflationary pressure, which would likely give the rand another boost while dollar traders are busy eating Turkey (http://www.marketwatch.com/story/which-markets-are-closed-on-thanksgiving-2018-11-20).

Of course, when it rains it pours, and South Africa is also at risk for a further credit downgrade. Last year, the country lost its investment grade ratings with major credit ratings firms, putting it at risk to get kicked out of certain indexes. Having investors turn their back on South African assets would spark a selloff.

Since then, former President Jacob Zuma -- not the market's favorite due to his penchant for public spending and corruption allegations -- was replaced by market and reform-friendlyCyril Ramaphosa (http://www.marketwatch.com/story/south-african-assets-rally-on-reports-that-president-zuma-will-step-down-2018-02-06). But a general election is scheduled for next year and the economy looks shaky.

The iShares MSCI South Africa (EZA) was up 2.2% on Wednesday, while still looking at a more than 25% drop in the year so far. The FTSE/JSE Large Cap Index finished Wednesday's session up 0.6% but is down nearly 14% this year.

-Anneken Tappe; 415-439-6400; AskNewswires@dowjones.com

(END) Dow Jones Newswires

November 21, 2018 13:46 ET (18:46 GMT)

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