A quick glance at the figures proves that the South African government has performed relatively well in combating the impact of COVID-19, recording 10,652 cases and a relatively paltry 206 deaths as of May 12th.
Like most emerging economies, however, effectively safeguarding citizens from the effects of the pandemic has required a significant economic trade-off, with many businesses (including property giant Pam Golding) deciding to slash basic salaries and suspend all pension fund contributions other than risk premiums.
However, the economy may be well-placed to recover quickly in the near term, and the South African Rand (ZAR) could also offer opportunities to investors in the future. Here’s why.
A Look at South Africa’s Currency – Then and Now
Historically, the rand has served as an outlier in the world’s financial markets, while it was tipped as a viable buy at the so-called “Bank of America Merrill Lynch” as recently as Q4 2019.
It has performed exceptionally well when investor risk appetites have faltered, and this was definitely the case last year as the geopolitical tensions between the U.S. and China reached a fever pitch.
The reason for this is simple: Forex markets such as ZAR tend to benefit directly from equality inflows that occur in instances where equities are the asset class most likely to thrive as a result of specific market developments.
Of course, the historical appeal of the ZAR has meant little of late, with the currency enduring a harrowing start to 2020 and Tickmill reporting that the currency slumped to a record low against the U.S. Dollar (USD) as recently as April.
There are several factors behind this slump (aside from COVID-19), including soaring government debt, several credit-rating downgrades, and the expulsion from a significant bond index tracked by billions of dollars of funds.
The good news here is that the ZAR has undoubtedly reached rock bottom and is unlikely to fall any further in the near term. In contrast, the fact that these destructive news items are already priced in could leave the currency poised for a rebound as South Africa and similar emerging markets embark on a period of recovery.
The Long-term Outlook for the Rand
This relatively positive sentiment is indicative of the broader economic climate in South Africa as the new President, Cyril Ramaphosa, takes practical steps to reverse the impact of years of shrill populism and financial incompetence.
This represents a long-haul journey, however, that has seen South Africa slip into two recessions since the new leader took office in February 2018.
However, the groundwork is being laid for a brighter and more sustainable outlook, one that will boost South Africa’s economic performance and attract significant investment from overseas. This is particularly true if South African stocks and currencies are undervalued, which is likely during periods of economic decline and austerity.
Of course, this will have a positive impact on the value and demand for the ZAR. South Africa’s increasingly progressive approach to regulating cryptocurrency trading could also benefit the market and create new opportunities for traders.
