SA hit by one-two punch of falling rand and capital outflows - Moody's

South Africa has been one of the emerging markets worst affected by Turkey’s economic slump, with both major capital outflows and a falling rand, according to a new report by global ratings agency Moody’s. 

The report on emerging market contagion caused by Turkey’s financial troubles was published on Friday. 

Moody’s said that while some EM countries had seen their currencies weaken against the dollar, and other experienced significant capital outflows, SA had been hit by a one-two punch of both a falling rand and of outflows equities and debt. 

“Over the past month, portfolio outflows from South Africa have been the largest, out of those emerging markets tracked by the Institute of International Finance,” it said. 

“The emerging market countries that the Institute of International Finance tracks daily experienced $2.7bn of portfolio outflows over the week to 17 August 2018 when concerns over Turkey escalated, compared with broadly balanced flows in the first six months of the year.”

Moody’s currently has South Africa’s long-term sovereign debt at Baa3 – one rung above subprime. The outlook is stable. 

Lira pulls down rand

Turkey’s lira has plunged by over 50% against the dollar in 2018, due to a combination of a trade tariff dispute with the US, what Moody’s describes as “heightened investor concerns about Turkey's twin current account and fiscal deficits” and an “erosion of the strength of the country's public institutions” under its President Recep Erdogan.

The fall in the lira pushed down the value of EM currencies in general, including the rand, which has fallen by 15% against the greenback this year. 

The ratings agency said that country-specific factors had also contributed to EM weakness. In the case of SA, these included relatively high wage settlements in the public sector, and ongoing uncertainty about the implementation of land reform.