South Africa is the most exposed sub-Saharan African state to market volatility and a potential shift in investors’ risk perceptions because of Brexit, ratings agency Moody’s said on Friday.
In a report, Moody’s said a possible rise in global risk aversion linked to Britain’s decision to leave the European Union could impede South Africa’s economic recovery
“South Africa’s current account deficit leaves it vulnerable to short-term capital outflows amid changes in investors’ risk perceptions and appetite,” Moody’s said in a report.
South Africa's current account deficit leaves it vulnerable to short-term capital outflows amid changes in investors' risk perceptions and appetite.
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The local rand currency stumbled nearly 5 percent against the dollar on June 24, its biggest daily loss in almost five years, after Britons voted in a June 23 referendum to exit the EU, triggering global risk aversion.
Because of South Africa’s highly liquid market and its reliance on portfolio flows to plug a current account gap of around 5 percent, the rand tends to be more sensitive than emerging market peers to swings in risk appetite.
“Countries such as South Africa that rely on private-sector capital inflows to finance large current account deficits are at greater risk than others,” Moody’s said.
South Africa has been the largest recipient of British foreign direct investment (FDI) in Africa, accounting for about 30% of total UK investment in Africa in 2014.
Subdued growth in the UK would also have a moderately negative impact on SA’s trade and growth. Although the UK accounted for only for 4% of SA’s total merchandise exports in 2015, Britain accounts for about 20% of South Africa’s exports to the EU.
“If the UK slowdown or new trade arrangements were to weigh on EU growth more than currently expected, the SA economy, which contracted in the first quarter of 2016 due to both external shocks and domestic structural bottlenecks, would be under more pressure,” explained Moody’s.