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Cape Town – South Africa is the second most vulnerable economy to shocks stemming from increases in the US real interest rates, says Japanese bank Nomura in a company note.
In its report on emerging markets, Nomura’s Peter Attard Montalto and Inan Demir ascribe South Africa’s vulnerability to relatively fast inflation and credit growth, but noted that the improvement in the current account balance puts the country on a sounder footing.
There is however the danger of further credit ratings downgrades, which may result in South Africa dropping out of the World Government Bond Index.
In April this year, ratings agencies Standard & Poor's (S&P) and Fitch downgraded South Africa's sovereign credit rating to sub-investment grade, or junk status. Moody's downgraded South Africa's debt rating to Baa2 from Baa1, which is still at investment grade, but assigned a negative outlook to the country.
In its report, Nomura considered the vulnerability of emerging market economies in light of real rate shocks, especially in light of these economies’ reaction to the so-called "taper tantrum" in 2013.
The “taper tantrum” occurred in 2013 when the US Federal Reserve used tapering to gradually bring down the amount of money it made available into the economy, which led to a rapid withdrawal of money from the bond market. This in turn pushed bond yields higher.
During the period from May to December 2013, Turkey (which is regarded as the country most vulnerable to real rate shocks) and South Africa experienced the biggest currency depreciations.
At the time, both Turkey and South Africa had small reserves, fast credit growth, wide current account deficits and high inflation.
Nomura notes that the rand dropped by 20% during the taper tantrum despite having depreciated 15% in real terms in the preceding three years.
South Africa is however in a better position currently to absorb a real rate shock, owing to improvements in external balances and inflation, although domestic politics has become more prominent lately.
“South Africa has a real rate buffer,” Nomura says, “as the South African Reserve Bank (SARB) is unlikely to cut interest rates, and there is a tighter current account deficit."
The narrative in South Africa has however shifted to growth, politics, gradually increasing fiscal deficits and higher debt. There is also the added risk of contingent liabilities of state-owned entities, which have racked up debt of hundreds of billions of rand, says Nomura.
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