The analysts at Brown Brothers Harriman are out with a new update on the South African economy, and it’s pretty bearish.
“The rand is one of the worst performing EM currencies,” BBH notes, “down nearly 17% year to date against the dollar.”
In April, the country will hold general elections, but BBH notes that the current ruling party is widely expected to remain in power despite “ongoing poverty, corruption, and labour strife.”
BBH Signals four main tenants of their fundamental outlook for South Africa:
Fundamentals remain terrible, with little relief in sight. On Wednesday, South Africa reports October CPI and it is expected to rise 5.7% y/y vs. 6.0% in September. This is still near the top of the 3-6% target range. When the South Africa Reserve Bank meets Thursday, it is widely expected to keep policy rates steady at 5.0%, frozen by a combination of high inflation, a weak rand, sluggish growth, and high unemployment.
Markets were rattled today by news that the South Africa’s main power company, Eskom, lost generating units and asked customers to reduce usage. It is still unclear whether there will be blackouts as a result, but the company stated that the risk to power cuts is the highest since 2008.
Last week’s revisions to trade data helped underpin the rand a bit. However, the SARB later said that the revisions would have less impact on its current account series as it already incorporates its own adjustments to trade that SARS has just started to make. As such, the current account data is unlikely to reflect the sharp improvement in the trade data.
Fiscal data remains a weak spot, and we think it is something that likely triggers ratings downgrades over the coming year. Our model views South Africa as BB+/Ba1/BB+, well below actual ratings of BBB/Baa1/BBB. There is a serious problem with twin deficits, as the budget gap is seen above -5% of GDP this year and next while the current account gap is seen above -6% of GDP. Short-term debt to reserves is also very high near 65%, marking heightened vulnerability to hot money flows.
Basically, things don’t look great for the emerging market.