The South African rand fell in early trading on Monday as the Turkish lira continue to slide due to investor worries over President Tayyip Erdogan’s increasing control over the Turkish economy, as well as the country’s deteriorating relations with the United States.
While economists agreed that Turkey had its own issues — Commerzbank analysts do not think its monetary policy is decent – George Magnus, an economist and associate at China Centre, Oxford blamed the currency crisis on the United States’ monetary tightening cycles, which he noted had always been problematic in globally integrated capital markets and had put currencies and borrowing costs in emerging markets under pressure. Turkey’s situation was made worse by the standoff with the U.S., and the contagion effect of the financial crisis in the country is now being felt by other emerging economies.
The rand lost more than 10 percent of its value earlier on Monday to 15.7000 per dollar, its weakest since June 2016.
Renaissance Capital global chief economist Charles Robertson noted that it was quick for the rand to feel the impact of the crisis in Turkey due to its volatility.
“South Africa’s rand is the most over-traded currency in the world — the equivalent of about 17 percent of its GDP is traded a day – so it’s the best proxy for EM risk and is whacked today because of Turkey,” Robertson said.
Societe Generale SA strategist Jason Daw expects the rand to continue to be influenced by the lira crisis due to market sentiments.
“Until the lira stabilizes, the prospects for the South African currency are not encouraging,” Daw wrote in a research note.
Raymond Parsons a professor from the North West University School of Business and Governance in South Africa also foresee a somewhat bleak future for the rand. “Even if the rand recovers in the short-term, the international economic environment at the moment still presents a worrying outlook.”
According to Parsons, to avoid vulnerability to external shocks and rand volatility, South Africa needs to make its economy less dependent on short–term capital inflows. He noted that such global capital flows often reflect sudden shifts in global sentiment and are easily reversed.
“Not for nothing are such capital flows often described as ‘hot money’. As a highly liquid currency, the Rand then responds, depending whether such investors want to increase or decrease their exposure to emerging markets like SA. Domestic factors then also come into play in their decision-making,” said Parsons.
The MSCI Emerging Markets Currency Index slumped to its lowest level in more than a year, following Erdogan’s stance in a standoff with the Donald Trump-led U.S. administration. Considering that investors are already cautious about emerging markets, there are fears that Turkey may be going into a full-blown financial crisis and may drag South Africa, where there are also concerns about the government’s policy on land and mining, with it.
Professor Bonke Dumisa from the University of KwaZulu-Natal, South Africa is positive about the rand’s future, blaming the currency’s fall on market manipulators. He said that the manipulators wanted to “make a killing as quickly as possible”.
“So it’s all a matter of being opportunistic.”
“Investors are nervous chiefly because of concerns about Turkey, which are dragging down other emerging market currencies like the Rand,” he said. However, he warned that the South African economy could be hard hit if the current situation continues.
“I don’t think it will be a long-term thing,” he added.
Losses in the lira were trimmed when Turkey’s central bank said it had lowered reserve requirement ratios for banks in a bid to boost liquidity and would take every necessary step to maintain financial stability. However, investors may not be impressed, as reports claim that the country’s interior ministry was considering taking legal measures against social media statements “creating a negative perception of the economy”.