South Africa’s improved risk profile has bolstered investor confidence. Consequently, foreign investors are showing greater interest in portfolio exposure to SA, which is supporting the ZAR.
Simultaneously, global monetary easing is also contributing to capital flows into higher-yielding, relatively stable emerging markets like SA. This dynamic, driven by interest rate differentials between SA and developed economies, will likely continue to drive capital flows to SA.
BASELINE VIEW:
Capital inflows into South Africa have increased, supported by a combination of push factors (global conditions such as lower interest rates in developed markets) and pull factors (SA’s relative political stability, economic recovery, and improved sentiment following the formation of the GNU).
Should the SA government progress in implementing much-needed reforms and encourage private sector participation, the ZAR can appreciate even further. The global backdrop of global monetary easing is reigniting a search for yield, and SA’s improving risk profile makes it a prime candidate to attract capital flows.
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