Political uncertainty amid risks of rating downgrade continues to pressurize ZAR

The South African rand is witnessing continuous pressure, following ongoing political uncertainty in the country, coupled with risks of a rating downgrade. Further, the central bank is expected to leave its key rate unchanged at 7 percent today rather than hiking interest rates.

The most recent South African economic data was not exactly positive; the unemployment rate rose to over 27 percent in Q3 and the inflation rate also rose to 6.4 percent in October. That means it has eased only slightly against its high in February of 7 percent and remains stubbornly above the central bank’s target corridor of 3-6 percent.

The central bank (SARB) is increasingly stuck between a rock and a hard place in the shape of the weak economic data on the one hand and the increased depreciation pressure on the rand on the other. After all, in its October report, it expected the rate of inflation to return to the target corridor in the second quarter of 2017.

However, the biggest risk in this context is the rand. In addition to global factors, it is mainly the political uncertainty in South Africa that is putting pressure on the rand as well as the risk of a rating downgrade.

"We assume that the central bank would react to notable depreciation with a rate hike so as to counteract the risks of inflation and raise the currently low levels of real interest rates as the country depends on capital inflow due to its high current account deficit. However, it is still too early for a rate hike today; the SARB will try to keep its powder dry for as long as possible," Commerzbank commented in its latest research report.