Fears of global recession causes investor pullouts

According to Sanlam Group economist Jac Laubscher, in the past the Rand acted as a cushion, shielding the economy to a degree and absorbing much of the madness on the global markets.

“With fears of a global recession rising at the moment, investments are being withdrawn from emerging markets.

“Within emerging markets, South Africa is one of the biggest commodity producers. In times of recession, commodity prices will be substantially lower which is also hurting our economy,” Laubscher told BuaNews.

South Africa's high current account deficit, is another stumbling block for the economy, he said.

A high current account deficit is dependant on and requires a constant inflow of foreign capital, but investor capital flight in the face of recession will put the South African economy under pressure.

The high current account deficit is mainly due to South Africa's need for construction materials and machinery to feed into its multi-billion rand infrastructure overhaul ahead of the 2009 FIFA Confederations Cup and World Cup in 2010.

South Africa has, however, managed to build up large foreign reserves and the Rand has remained resilient in the face of prevailing market conditions, said Laubscher.

“Its ironic that because the eye of the storm has fallen in developed countries, that developing countries are effectively paying the price with investors withdrawing to reinvest in developed countries.

“It's almost a redefining of what risk actually is,” he said.

South Africa's local currency dropped to its lowest levels against major currencies, registering its biggest loss to the Dollar since August 2002.

The Rand slid to R10.80 in early morning trading on Thursday but has managed to rebound slightly to just around the R10 level at midday.

The price of gold and platinum, South Africa's main commodities, has taken substantial knocks dropping by 1,27% and 4,08% respectively.

The price of gold at midday is trading at $836.80 per fine ounce, while an ounce of platinum is worth $916.

The price of Brent Crude oil, trading at R67.91, is also off major highs sustained earlier this year when record oil prices rocked the market at $147 per barrel.

Article published courtesy of BuaNews