South African rand to remain under pressure owing to inflation-related risks, says Commerzbank

The South African rand is expected to remain under pressure, owing to inflation risks and fears of a deterioration in the price outlook of the country, according to the latest research report from Commerzbank.

The South African rand came under notable pressure yesterday and USD/ZAR rose to 13.90 after a rating agency had published a report on the risks of EMs and their susceptibility in case of significant strength in the greenback. The critical factors are seen to be high current account deficits and high foreign debt levels, above all in foreign currencies.

Moreover the risks of an escalating trade conflict were stated, as well as the risk that the South African government’s plans for land expropriation without compensation might put off foreign investors. The risks are not new. South Africa has learned from former shocks. Foreign currency debt has been reduced. However, the country continues to depend on external capital investors.

That is also illustrated by the high level of rand denominated government bonds held by foreigners. Moreover the current account deficit eased notably until year-end 2017. However, more recent data for Q1 2018 signals a surprising strong rise again. The fact that the rand reacted so sensitively to the report is also likely to be due to the weak economy and the low inflation levels, as these dampen rate hike expectations, the report added.