Battered rand will bring pain to SA, warn economists

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At 10.38 on Friday the unit was trading at R16.03/$ from a close of R16.06 in the previous session. "It's not only South Africa, the world is an unhappy place," Adam Phillips, independent treasury consultant at Umkhulu Consulting, told Fin24.

"In case you thought it is just the ZAR that has a problem, it is the world that has a problem at the moment. Overnight the Chinese authorities turned off the circuit breakers on their stock market and this was coupled with the central bank setting a slightly stronger mid rate on the yuan."

Trading in Chinese stocks was halted for a second day this week after circuit breakers kicked in following a 7% drop in China's CSI 300 Index. The selloff was sparked by the Chinese central bank cutting its yuan reference rate by the most since August. "Stock markets in the Far East are all back in the blue today, as we end the first week of 2016 wondering what else can hurt markets," said Phillips. He said the Australian dollar was leading the recovery on Friday morning, which has helped the rand to move through R16.00/$ and trade down to R15.94.

Rand suffers from global selloff

According to Brett Birkenstock, director at Overberg Asset Management, the rand is the world's most liquid emerging market currency and has felt the force of the global selloff. "However, the rand is not alone and many other emerging market currencies have been dealt the same fate." He said the rand is, however, substantially weaker than it might have been had South Africa not experienced the Nenegate saga last month.

Nenegate is widely used as a reference to the firing and replacement of Finance Minister Nhlanhla Nene on 9 December last year by relatively unknown ANC MP David van Rooyen, who in turn was replaced four days later by Nene's former boss Pravin Gordhan. "The rand is yet to recover to pre-Nenegate levels," said Birkenstock.

Economist Mike Schussler from Economists.co.za sketched a grim scenario for the South African economy should the rand lose 20% from its value against the greenback in 2016. Last year the rand gave up 25.9% of its value. "If the rand should fall just another 20% over the next year then by the beginning of 2017 a dollar would cost R20. That R20/$ is on the cards so quickly is frightening for the country."

The rand has so far lost 3.65% of its value in the first four trading days of the year.

MMI economist Sanisha Packirisamy said the recent slide in the rand has been accompanied by a broader-based selloff across emerging markets in general triggered by recent currency moves in China. The Chinese yuan traded at its lowest level against the US dollar since 2011, following poor economic data reflecting a contraction in China's manufacturing sector for the tenth consecutive month in December 2015.

"Emerging markets most exposed to lower growth prospects and subdued commodity prices have seen the sharpest falls. Further ambiguity around domestic economic policy in an already-fragile local growth environment is likely to keep the SA rand under pressure in the near term," she said.

Double-edged sword

A weaker rand will see the cost of imported goods for consumers rise, making it more expensive for consumers to purchase items such as imported electronics or other durable and semi-durable items sourced from abroad, warned Packirisamy. Local consumers also won't benefit from the slide in global oil prices to record low levels closer to $30 a barrel. "This means that as the rest of the world get lower petrol prices, we get ones that are higher. It also means that wheat and maize prices have risen and will rise more. Things like a loaf of normal bread will go up and we risk some bread prices going to R20 a loaf within the next two years or so. This is a real, serious threat," Schussler warned.

In addition, currency weakness and volatility exacerbate the low growth-sticky inflation conundrum. This is because sustained rand weakness poses a threat to the South African Reserve Bank's inflation profile, which it has projected to average close to the upper target of 6% in 2016, said Packirisamy.

On the other side of the coin, the weaker rand is helping SA mines stay afloat and gold mines are probably making profits again as the gold price has held up more than coal or iron ore or platinum, said Schussler. "We could see a boost in tourism (especially with the visa restrictions relaxed somewhat) and a boost for local exporters, but that is where the positives end," said Birkenstock.

But, said Schussler, tourism should have benefited more as "some foreigners could literally buy some of our rural homes on their credit cards and R2,000 hotel rooms per night cost only £85 - that is less than a meal for two at a larney place in London".

"It may well be a very hard year for the South African public," cautioned Birkenstock.

Source: Fin24 via News24 Wire