Europe News

South African rand hits low – more pain coming?

South Africa's rand hovered around a record low on Thursday following the dismissal of the country's finance minister, but more pain for the currency is expected when the Federal Reserve raises interest rates, according to analysts.

On Thursday morning the rand continued to weaken against the greenback with the dollar worth 15.2405 of the South African currency by midday London time. This compared to its close of 14.9748 in New York.

On Wednesday, South African equities declined and the currency fell to a record low of 15.30 after South African President Jacob Zuma surprised markets by removing Finance Minister Nhlanhla Nene from his post, replacing him with a "relatively unknown member of parliament," according to Reuters.

Showing that the move was not a popular one, the hashtag #ZumaMustFall started trending on Twitter with social media users saying that the increasingly unpopular Zuma, and his ANC (African National Congress) party, were not acting in the best interests of the country. Many Twitter users also called for him to go.

More pain to come?

Zuma's move comes amid increasing concern over South Africa's economy and outlook, particularly with the immediate prospect of a predicted 25 basis point rate hike by the U.S. Federal Reserve when it meets next week.

The move is widely expected to decrease investor appetite for emerging market assets and increase capital outflows from EM (emerging market) economies, reversing the inflows these experienced during the height of the Fed's QE (quantitative easing) program as investors fled the U.S. in search of higher yields.

On Wednesday, Deutsche Bank warned in its 2016 World Outlook, subtitled "managing with less liquidity," that the Fed's first hike since June 2006 could have an unpredictable effect on global markets.

Cape Town, South Africa: An 'Easily recognizable city with strong international company presence'.
Carl Fourie | Stringer | Getty Images

"While Deutsche Bank's baseline scenario sees the global economy continuing to grow at a moderate pace over the next two years, there are substantial risks on either side. On the down side, global financial markets could respond much more negatively to Fed normalization than expected, with adverse repercussions for household and business spending around the globe," global head of research at Deutsche Bank, David Folkerts-Landau, said.

While he did predict that the coming year "should see growth in emerging market economies recover somewhat" he warned that 2016 would be challenging for emerging markets like South Africa, "as falling commodity prices and weak global trade growth extend the recent experience of budgetary and balance of payments pressures."


Such headwinds have not gone unnoticed by ratings agencies. Last Friday, ratings agency Fitch lowered the country's foreign debt rating to BBB-, one notch above "junk" status. Speculative grade or junk debt refers to bonds that carry a rating of 'BB' or lower from Standard & Poor's or 'Ba' or below from Moody's. Standard & Poor's, meanwhile, lowered its outlook to negative from stable although it held its credit rating at BBB-. Both agencies cited weakening growth potential as a reason for their actions.

S&P warned that the country's "pace of economic growth remains slow."

"External demand is weak, with low commodity prices, and the country faces domestic constraints including an inadequate electricity supply and overall weak business confidence inhibiting substantial private sector investment," S&P said in a statement. It predicted growth of 1.4 percent for 2015, down from its forecast of 2.1 percent made in June.

JPMorgan's 10 investment themes for emerging markets in 2016

On the back of the ratings agencies' latest outlook, analysts are also worried. Heinz Ruettimann, strategy research analyst of emerging markets at Julius Baer advised investors to remain underweight South African equities.

"Only a week ago, Fitch lowered South Africa's country debt to BBB- and S&P lowered its outlook to negative. For now South Africa is still rated investment grade by all three agencies. This may change with the current account and budget deficit of -4.1 percent of gross domestic product (GDP) and no improvement in sight," Ruettimann said in a note Thursday.

"President Zuma firing his finance minister Nene was the tipping point for the ZAR currency to sell off. This year alone the ZAR has depreciated by 23 percent versus the USD. The MSCI (Morgan Stanley Capital International) South Africa has now broken down and remains an unattractive investment. Taking the macroeconomic backdrop into account, the equity risk premium should trade at far higher levels," he added.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow CNBC International on Twitter and Facebook.