The pound to rand (GBPZAR) pair dropped slightly as investors reacted to news of a new stimulus package from South Africa.
South Africa coronavirus stimulus
In a statement yesterday, Cyril Ramaphosa, said that the government would unveil a $26 billion stimulus package to offset the damage caused by the coronavirus pandemic. The amount is equivalent to the country’s GDP and is the biggest package in Africa so far. Part of the funds will be borrowed from the IMF while the rest will be gotten from an “extraordinary coronavirus budget.”
In the statement, he said that the funds will be used to provide welfare services to the people, provide grants to companies, and provide loan guarantees to help companies recover from the pandemic. Before the announcement, South Africa was the only major country that had not announced a stimulus package. The president said:
“The pandemic requires an economic response that is equal to the scale of disruption it is causing.”
Still, there are questions about how effectively-well the country can use these funds. For one, South Africa is known for its high rate of corruption and inefficiency. Also, there are questions about its overall debt. With the new financing, the debt to GDP ratio will approach 100%, making it the biggest among its peer countries.
In addition, there are questions about whether South Africa can revive its important businesses such as those in the mining sector. Other industries at stake are manufacturing and aviation. Just last week, the country said that it will not support its ailing airline. The company fired all its staff over the weekend.
South African rand declines
The South African rand has been among the worst-performing currencies. The USDZAR, GBPZAR, and EURZAR have declined by more than 15% this year because investors were concerned about the country. Worse, the South African economy was in a recession even before the current crisis started. It entered into a technical recession in the fourth quarter.
The GBPZAR pair reached the important resistance level of 23.6588 as I had predicted in the previous article. I based this on the cup and handle pattern, which was forming as you can see on the four-hour chart. Therefore, since the pair has completed the cup part, I expect it to decline further and possibly test the 23.6% Fibonacci Retracement level at around 22.740.