Cape Town – South Africa represents the perfect storm in the emerging market space, Nomura analyst Peter Attard Montalto said on Friday.
"SA is a country that is in the crosshairs from a Fed lift-off and a China slowdown or continued commodities slump," he said. Nomura expects a Federal Open Market Committee (FOMC) decision on what it calls rates lift-off most likely in December.
He added that, while it seems unlikely that any emerging market country will emerge unscathed through a Fed lift-off, some will perform worse than others.
He mentions Turkey as standing out as a comparatively risky option, for instance.
Russia is less sensitive to a Fed lift-off, in Montalto’s view, at least from a funding cost perspective "as it finds itself under sanctions and is effectively locked out of dollar, euro capital markets".
READ: Surprising CPI level won’t stop rate hike – Nomura
"In general, South Africa is susceptible in the way one would expect for an emerging market. As of the first quarter, South Africa was a net debtor in portfolio flows equivalent to 24% of its GDP. With such a build-up of foreign funds, this is certainly earmarked as a capital-outflow vulnerability," explained Montalto.
"When you add in the effect of a deteriorating current account balance – particularly owing to falling commodity export revenues and a China demand slowdown – South Africa is not as safe as it perhaps seems."
He found it interesting in his analysis to find that in stock terms SA has a low level of exposure on other investment.
"We see this as partly reflecting the country’s exchange control framework that remains in place and shields it from currency weakness markedly impacting growth through external borrowings. On the flipside it means there are fewer portfolio assets of South Africans abroad to repatriate in times of stress and currency weakness," said Montalto.