Rand hits R16 to British pound

President Jacob Zuma accompanied by Minister of Finance and Governor of the Reserve Bank Gill Marcus announced the new R10, R20, R50, R100 and R200 bank notes bearing former President Nelson Mandela”s face in Pretoria. 11/02/2012

Rand hits R16 to British pound – but Mandela’s ill health not to blame

Experts predict difficult times for the South African economy after the rand’s decline, and assess that Nelson Mandela’s poor health is not adding to the currency’s weakness, rather it is a mixture of national and international factors such as labour unrest.

Rand hits R16 to British pound

President Jacob Zuma accompanied by Minister of Finance and Governor of the Reserve Bank Gill Marcus announced the new R10, R20, R50, R100 and R200 bank notes bearing former President Nelson Mandela”s face in Pretoria. 11/02/2012

New bank Notes

The rand sank to £16 to the British pound on Tuesday morning, having hit new lows on Monday afternoon when it reached R10.24 to the US dollar, which puts it among the worst-performing currencies at the moment.

The South African currency has dropped by over 10 percent against major currencies this month. Only on Monday, it lost nearly 20 cents against the dollar.

“Expect inflation, social tension, weak economic growth, high unemployment and poverty after the collapse of the rand. I think the currency will soon regain some lost ground but much damage has been done already and the consequences will be painful,” warned Dawie Roodt, the Chief Economist of the Efficient Group, financial services company.

He acknowledged that a weak currency had some advantages such as creating a better position for exporters to compete internationally, however he did not  doubt that: “The disadvantages of a weaker currency are much more harmful than the possible benefits.

“The most obvious disadvantage is that we are all poorer because of the rand’s weakness.”

He stressed that it will be the poor and the unemployed who will be hit the hardest: “Their wage increases will be last in the chain of price increases that will wash through the economy. In the case of the unemployed, [who] have no income, yet their cost of living will go up like that of everybody else.”

South Africa’s bond market has already weakened sharply on Monday.

“The general state of the economy is not good at the moment. We’re in a bad space. Low growth and continued labour unrest are putting pressure on the rand‚” Iquad currency dealer, Tony van Dyk, explained the reasons behind the rand’s constant fall in recent weeks.

Economists seemed to agree that Nelson Mandela’s hospitalisation did not influence the rand’s fall. Lynden Reabow, senior currency trader at Nedbank Capital, admitted it was hard to assess whether the former president’s illness had any impact on the currency, but said that Mandela was “pretty much out of action,” in the governing of the country and he had suffered a long illness.

According to Reabow, main factors behind the poor currency performance included the general labour unrest and gross domestic product statistics that were “quite down.” A larger-than-expected trade deficit and lower consumer spending levels also contributed to the rand’s fall, as well as some international factors such as the strong dollar and the improvement of the euro.

Arthur Kamp, investment economist at Sanlam Investment Management, also did not believe there was “a strong link,” between Mandela’s health and the currency’s decline. Kamp blamed the rand’s weakness on the persistent current account deficit and a  low portfolio of investment inflows

Standard Bank rand strategist, Bruce Donald, summed up that the rand’s fall was due to “a cocktail of adverse global and domestic developments.”

He pointed that Chinese industrial data released last weekend was weaker than hoped. According to Standard Bank’s analysis the rand’s relationship with emerging market currencies has been stronger during the past month than with other financial market variables.

“China has become an increasingly important export market for South Africa and also a key player in international commodity markets. For the rand to move from the back foot, where we are now, onto the front foot, we will need to see a turnaround in the underlying drivers of commodity prices,” explained Mr Donald.

He added that South Africa had entered the wage negotiation season, known as the strike season, which increased fears about production disruptions in key export sectors.

There were also concerns about electricity outages as temperatures dropped. On Monday night, South Africa came dangerously close to a blackout after overwhelming demand for electricity squeezed the reserve margin to 0.2 per cent.