This is not a paywall.

Register for free to continue reading.

We made a promise to you that we’ll never erect a paywall and we intend to keep that promise. We also want to continually improve your reading experience and you can help us do that by registering with us. It’s quick, easy and will cost you nothing.

Nearly there! Create a password to finish up registering with us:

Please enter your password or get a login link if you’ve forgotten

Open Sesame! Thanks for registering.

First Thing, Daily Maverick's flagship newsletter

Join the 230 000 South Africans who read First Thing newsletter.

We'd like our readers to start paying for Daily Maverick

More specifically, we'd like those who can afford to pay to start paying. What it comes down to is whether or not you value Daily Maverick. Think of us in terms of your daily cappuccino from your favourite coffee shop. It costs around R35. That’s R1,050 per month on frothy milk. Don’t get us wrong, we’re almost exclusively fuelled by coffee. BUT maybe R200 of that R1,050 could go to the journalism that’s fighting for the country?

We don’t dictate how much we’d like our readers to contribute. After all, how much you value our work is subjective (and frankly, every amount helps). At R200, you get it back in Uber Eats and ride vouchers every month, but that’s just a suggestion. A little less than a week’s worth of cappuccinos.

We can't survive on hope and our own determination. Our country is going to be considerably worse off if we don’t have a strong, sustainable news media. If you’re rejigging your budgets, and it comes to choosing between frothy milk and Daily Maverick, we hope you might reconsider that cappuccino.

We need your help. And we’re not ashamed to ask for it.

Our mission is to Defend Truth. Join Maverick Insider.

Support Daily Maverick→
Payment options

Political Risk Back on Radar in Emerging-Market Currenc...

Business Maverick

Business Maverick

Political Risk Back on Radar in Emerging-Market Currency Trades

A taxi van drives past the entrance to the Ikeja computer village market in Lagos, Nigeria, on Monday, March 29, 2021. Nigerians are having to contend with the highest inflation rate in four years, the second-highest unemployment rate on a list of 82 countries tracked by Bloomberg, and an economy that’s only just emerged from recession. Photographer: Adetona Omokanye/Bloomberg
By Bloomberg
19 Jul 2021 0

South Africa’s unfolding turmoil is putting emerging-market political risks at the fore, and traders are hunting for currencies vulnerable to political hazards and playing them off against their more stable peers.

Citigroup Inc. and Deutsche Bank AG were among the lenders recommending investors to short the South African rand last week as deadly riots threatened to derail an incipient economic recovery. Chile’s peso is also seen as vulnerable relative to more stable units such as the Russian ruble.With elections coming up in many major developing nations over the next three years and the pandemic worsening socio-economic fault lines, “political long Covid” may cast a widening pall, according to Bank of America Corp. Of particular concern is what that means for monetary policy, as central banks weigh the risks of higher inflation against the need for economic support.

“Part of what’s happening in South Africa is the delayed effect from the social and economic devastation triggered by Covid, which we are likely to see more of in the future,” said Francesc Balcells, the London-based chief investment officer of emerging-market debt at FIM Partners. “You want to stay away from crowded trades that have embedded a lot of political risk.”

Chile's peso and South Africa's rand underperformed EM peers last week

While the rand remains this year’s top emerging-market performer, it has fallen as the violence that erupted following former President Jacob Zuma’s jailing presented a deepening crisis for his successor, Cyril Ramaphosa. Last week, the currency touched its weakest against the dollar since March — though it clawed back some losses on Friday — as the potential blow to the economy from the turmoil and a spike in Covid-19 cases reined in expectations for tighter monetary policy.

South Africa will likely keep its interest rate unchanged on Thursday, economists predict. With a more hawkish policy stance in Russia, UBS AG said it prefers the ruble to the rand, with a potential weakening in metal prices adding to pressure on the South African currency, according to Manik Narain, the head of emerging-market cross-asset strategy at UBS in London. Russia is expected to raise its benchmark rate by 75 basis points on Friday.

Kota Hirayama, an emerging-market economist at SMBC Nikko Securities Inc. in Tokyo, suggested selling the rand and buying Turkey’s lira after that country’s central bank resisted President Recep Tayyip Erdogan’s calls for lower rates and vowed to maintain its monetary stance until a major drop in price growth.

“As for the rand, the riots have caused considerable economic damage, may quell market expectations for a rate hike while raising concerns that funds may flow out of the country,” Hirayama said. “Being long in the lira, which has higher interest rates, and shorting the rand is a rational trade as investors can earn yield differentials.”

While political heat has turned up in South Africa, Turkey is cooling

Others see the rand’s slump as a buying opportunity. Commerzbank AG now favors it against the lira, betting the Turkish currency’s gains against the rand since early June are likely to be reversed by October, according to Tatha Ghose, a London-based senior economist at the firm.

Credit Agricole CIB said it closed a strategy to buy the Chilean peso against the rand, booking a 2.3% profit after South Africa’s turmoil sent its currency tumbling. But the two countries’ fortunes may soon reverse as presidential primaries on Sunday in the Latin American nation raises the heat there.

“We are getting concerned about rising political risks in Chile,” strategists Sebastien Barbe and Olga Yangol wrote in a note. “As investors’ attention increasingly turns to the political developments, we prefer to take the chips off the table tactically.”

The rand and Chilean peso were among the biggest developing-nation currency decliners against the dollar last week, along with Hungary’s forint and Poland’s zloty. Brazil’s real, Peru’s sol and Turkey’s lira advanced.

Election Risks

The sol has suffered the second-biggest loss in the developing world over the past three months, with leftist outsider Pedro Castillo winning the June 6 runoff. Investors are concerned that another less market-friendly candidate may emerge in Latin America as Brazilian President Jair Bolsonaro’s popularity falls to the lowest since assuming office ahead of general elections next year.

“There is a strong correlation between countries where you are seeing the potential for political instability — i.e. South Africa and much of South America — and a poor track record at combating Covid which is resulting in lagging growth vis-a-vis countries that were much successful in dealing with the virus,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd.

In South Africa, just 7% of the population has gotten at least one vaccination jab, compared with rates of around 50% or above for most European nations. It’s about 20% in Peru, while 44% of Brazilians and 29% of Colombians have received at least one jab, according to Bloomberg’s vaccine tracker.

Schubert is “less enthusiastic” about Peru, Colombia and Brazil because of the “potentially enhanced political volatility,” he said.

Colombia’s credit rating was cut to junk by S&P Global Ratings and Fitch Ratings as the nation’s debt outlook worsened after the government withdrew a bill to raise taxes which triggered mass civil unrest.

“Governments often indulge themselves in fiscal extravagance prior to elections, a choice not so readily available given the Covid-related fiscal largess of many countries,” said Marshall Stocker, a money manager at Eaton Vance Corp. in Boston. “That could make incumbent governments more vulnerable at the ballot box and in the streets.”

Rate Decisions

  • On Thursday, Bank Indonesia is forecast to keep its benchmark rate at a record-low 3.5%, according to a Bloomberg survey
    • The central bank will only start to tighten monetary policy next year if the recovery remains on track, Governor Perry Warjiyo said this month
    • Southeast Asia’s biggest economy has become a new virus epicenter. The government imposed its tightest movement curbs this month to halt the spread of the delta variant. Concern over the current outbreak has contributed to the rupiah’s 3.1% loss this year.
    • “The latest virus resurgence will hurt growth and delay an economic recovery,” Krystal Tan, a Singapore-based economist at Australia & New Zealand Banking Group Ltd., wrote in a note. “While BI will want to keep monetary policy accommodative, its focus will be on macroprudential measures and improving policy transmission.”
  • The same day, the South African Reserve Bank will probably keep rates on hold, though it’s likely to deliver a more hawkish statement, according to Bloomberg Economics
  • On Friday, the Bank of Russia is expected to step up the pace of tightening with a possible rate hike of 75 basis points or more as inflation runs well above target and shows no signs of easing

Key Data

  • China will announce one- and five-year loan prime rates on Tuesday after authorities cut the reserve requirement ratio for banks
    • They’ve been unchanged since the last cut in April 2020
    • The one-year gauge is the reference rate for bank loans to companies, while the five-year is for mortgages
  • Taiwan will report June export orders on Tuesday
    • They are likely to have increased by between 28.1% and 31.7%, government officials said last month. The data serve as a leading indicator for future demand for goods from the island’s companies.
    • Taiwan’s dollar is the best-performing currency in emerging Asia this year
  • Thailand will publish customs exports data for June on Wednesday
    • Exports jumped 41.6% in May, the most since 2010, data showed last month
  • Malaysia will announce CPI data on Friday, with the result expected to remain suppressed due to movement restrictions put in place
  • Brazil is set to release mid-July IPCA inflation data on Friday
    • The real has rallied the second-most in emerging markets this year
  • A reading of Argentina’s May economic activity index on Wednesday could take a hit from an uptick in mobility restrictions, data from Bloomberg Economics show
  • In Mexico, traders will watch bi-weekly inflation numbers on Thursday and retail sales figures for the month of May on Friday for clues on the path ahead for recovery and policy
  • Colombia’s economic activity results on Monday are expected to show an annual increase in May given the low base of comparison as the virus locked down cities in 2020, Bloomberg Economics forecasts

Comments - share your knowledge and experience

Please note you must be a Maverick Insider to comment. Sign up here or sign in if you are already an Insider.

Everybody has an opinion but not everyone has the knowledge and the experience to contribute meaningfully to a discussion. That’s what we want from our members. Help us learn with your expertise and insights on articles that we publish. We encourage different, respectful viewpoints to further our understanding of the world. View our comments policy here.

No Comments, yet

Please peer review 3 community comments before your comment can be posted