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.
