COVID-19: Rand takes nosedive and hits new all-time low
The rand is now weaker than ever due to the COVID-19 pandemic and a further downgrade by Fitch.
Our beloved rand has, on Friday 3 April, hit a new all-time low due to the unprecedented COVID-19 pandemic, among other things like a hefty downgrade.
According to Fin24, the rand breached the R19/$ mark as rating agency Fitch downgraded the country’s credit rating from BB+ to BB with a negative outlook on Friday.
Here’s why the rand is declining at rapid speed
Besides the impact of the COVID-19 pandemic, the rand is also under pressure following a Moody’s downgrade of South Africa to a sub investment grade last week Friday — also known as the enduring “junk status”.
According to Sable International, the Moody’s downgrade will result in the removal of South Africa from the World Government Bond Index (WGBI). It is a requirement of the WGBI to be rated investment grade by at least one of the three rating agencies.
Now that all three rating agencies — S&P, Fitch and Moodys — have downgraded South Africa to junk status, global investors that track this index will be forced to sell South African exposure. This will result in a mass outflow of capital of up to $12 billion according to analysts. Fortunately, for now, South Africa will remain on the index until the end of April.
President Cyril Ramaphosa said the downgrade to junk status would increase the cost of capital and that the economy would be negatively impacted — like the drop of the Rand — he wasn’t wrong.
Here’s how COVID-19 has affected our economy
This is how it goes. A global pandemic has been unleashed, one that has infected and killed countless people. In order to combat the spread of COVID-19 and diminish the loss of life, practically half of the world has been ordered to undergo lockdown, remain indoors, down their tools, close up shop and self-isolate or quarantine.
Without human beings, who are now ordered to remain in their homes for safety purposes, there is no doubt the economy would crumble.
According to Moneyweb, economic activity has been severely disrupted due to COVID-19 and lockdown, thus resulting in the dramatic drop of the Rand, too.
“With economic activity disrupted and capital markets dislocated, investors have been debating if COVID-19, known colloquially as the coronavirus, could derail the global cycle,” said global chief economist at Morgan Stanley, Chetan Ahya.
“Given the sharp drops in global asset markets recently, the coronavirus could deliver a sizable impact to global growth in the first half of the year. However some clear perspective on the outlook for the full year is warranted,” she added.