Money and Markets

Rand at its best level in months after EU agrees on historic R14 trillion recovery fund

Business Insider US
EU Summit at Brussels (Getty)
  • The rand has strengthened to its best level since mid-March after leaders of the European Union reached a historic deal Tuesday on a R14 trillion recovery fund aimed at the reconstruction of the 27-member bloc.
  • By the end of a 4-day summit, the heads of states agreed on distributing 390 billion euros (R7.4 trillion) in grants, and 360 billion euros (R6.8 trillion) in loans after reaching a compromise with a group of nations nicknamed the "Frugal Four."
  • The EU's seven-year budget, which supports long-term green and digital investments, was ratified at 1.8 trillion euros.
  • New debt from the recovery package is expected to be repaid by 2058.
  • Visit Business Insider's homepage for more stories.

* This article has been updated below.

The rand rallied to its best level since mid-March amid renewed optimism about the global economy following the EU leaders'  agreement on a landmark 750 billion euro (R14 trillion) recovery fund for the reconstruction of the region disrupted by the coronavirus pandemic.

The European Union is South Africa's biggest export destination, though exports to Asia as a whole outweigh that single market.*

The agreement was made public after European council president, Charles Michel, tweeted "Deal!" early Tuesday.

"These were, of course, difficult negotiations in very difficult times for all Europeans," he said in a statement.

French president Emmanuel Macron also cheered the end of the successful 4-day summit as a historic day for Europe.

After heated debate and difference of opinion on the specifics of grants and loans since last Friday, the heads of states reached common ground on an outline of how to invest the new funds at their first in-person summit in five months.

The leaders finally agreed on distributing 390 billion euros (R7.4 trillion) in non-repayable grants, down from an originally proposed 500 billion euros (R9.5 trillion) which was opposed by the Netherlands, Austria, Sweden, and Denmark - the so-called "Frugal Four."

The 27-member bloc accepted low-interest loans worth 360 billion euros (R6.8 trillion) following a compromise with the "Frugal Four" countries, which had raised concerns on whether the funds would be used only for the health crisis.

Originally, the total recovery fund was set at an amount of 500 billion euros in grants and 250 billion euros in loans.

The massive debt that will surface from the EU's recovery plan is expected to be repaid by 2058.

During the summit, leaders also agreed on a 1.8 trillion euro (R34 trillion) seven-year budget and Covid-19 recovery package aimed at rebuilding the bloc and supporting investment in "green and digital transitions".

The positive conclusion of the marathon Brussels summit will relieve many market participants whose hopes were pinned on the EU recovery agreement, said Sam Cooper, a vice president at Silicon Valley Bank.

The rand and other emerging market currencies rallied in response to the renewed optimism on global markets. On Wednesday morning, it was trading at R16.40/$ after briefly strengthening to R16.38. 

Dollar/rand rate over the past year. Source: XE

Schalk Louw, a portfolio manager at PSG Wealth, says the rand has now rallied by almost 16% against the dollar over the past six months, outperforming the euro (+6.3%) as well as currencies in Brazil (+2.8%), Russia (+10%) and India (+3.3%).

Despite the weak state of the SA economy, the rand has been more popular given its solid interest rate in a world of negative rates.  

A surprise current account surplus - the first in 17 years - has also helped. In the first quarter of 2020, South Africa exported almost R70 billion more in goods and services than it imported. This is good news for rand demand, as it means that fewer local importers had to sell rand and buy overseas currencies to pay for their imported goods.

Stronger gold, platinum and palladium prices have also bolstered the rand.

Recently, gold spot prices broke above $1,800 per ounce for the first time since 2011 as investors bought it as a "safe haven" investment. South Africa is among the top ten gold producers in the world. It is also the world's largest producer of platinum and, with Russia, dominates the palladium market.

The platinum price has recovered from below $600/oz in March, to close to $900, while palladium is close to $2,200 after dipping to below $1,500.

Louw's medium-term target for the rand is R15.50/$. If the Reserve Bank announces another rate cut on Thursday, the rand could come under pressure, though.

 * This article previously referred to China as the biggest export market for South Africa. Though Asia outranks Europe in that regard, the European Union as a single economic entity outranks China.

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