Emerging EMEA December 31, 2020 / 09:59 am UTC

The Rand Is Immune To COVID

By Francesca Beausang

USD/ZAR has fallen to 14.61, extending gains registered over November and December despite a major deterioration in South Africa's COVID outlook since the detection of a highly transmissible COVID mutation. 2021 is unlikely to be as clement to the rand as 2020.

The main short-term driver here has been USD weakness into year-end, on the back of uncertainty over the U.S. Senate’s passage of an increased stimulus and over the 5 January Georgia Senate election runoff. Unsurprisingly, the rand has behaved primarily as a gauge of risk-on sentiment and as an attractive carry trade. Yet the 18% rand strengthening since November appears excessive in the light of the South African COVID situation and its bleak outlook related to vaccine distribution. We think that while early 2021 could see further rand gains, they will reverse as the market refocuses on dire COVID and economic fundamentals. On the economic front, the new COVID mutation threatens the economic recovery which had begun in Q3 and will also further stretch debt dynamics, as it will cost a total of ZAR 2.7bn to secure South Africa’s full allocation of six million doses from the COVAX facility. We also think that the market is not fully aware of the scale of South Africa’s vaccine problem. South Africa’s only source of vaccines for now is COVAX as affordability remains a major constraint, with Q2 the earliest time for delivery. The Democratic Alliance called on the government to redirect a ZAR 10.5bn bailout for South African Airways towards purchasing vaccines. Discovery Health, which is South Africa’s biggest private medical insurer, has allocated funds for its members to get vaccines but it is still in negotiations with other private institutions and government to a secure a vaccine directly from manufacturers. 

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Analyst Certification
I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.