By Staff Reporter
When South Africa was lumped with the so-called “fragile five” emerging countries last year, government officials protested loudly at what they saw as a pejorative label.
As emerging market currencies, including the rand, tumbled, South African officials deflected any sense of crisis. They argued the currency had been overvalued. And, unlike India, Brazil and Indonesia, which committed billions of dollars to prop up their currencies, South Africa ruled out an intervention.
Yet, after months peppered with bleak domestic economic news, the rand – one of the most liquid emerging markets currencies – is once again under heavy pressure, this week testing the five-year low it hit earlier this year.
In January, the rand crossed the symbolic R11 to the dollar, at one point hitting R11.395 against the greenback, the weakest since October 2008. Now, after a period of relative stability it has fallen again below the key mark, on Wednesday hitting a 7-month low of R11.194 against the dollar.
Over the past year, the rand has lost 13.1 per cent against the dollar, compared with a 9.5 per cent fall for the Brazilian real and 12.1 per cent for the Turkish lira. The Indonesian rupiah has fallen 6.3 per cent over the same period.
For some, the recent weakness is a case of déjà vu: the rand’s slide is blamed on largely the same factors as earlier this year. “Obviously there are internal reasons, but the starting point is really related to the global theme,” says Murat Toprak, a foreign exchange strategist at HSBC in London.
The rand’s weakness in 2013 and early this year was in large part blamed on the US Federal Reserve’s decision to begin tapering its “quantitative easing” programme. This time, dollar strength and expectations the US will move towards monetary “normalisation” – a rise in interest rates from historic lows – are seen as affecting the rand.
“The reason it is performing so badly is that it is again related to one main topic – the fragile five. So the price action that we have at the moment is very similar to what we have seen last year,” says Mr Toprak.
But other analysts put more emphasis on domestic factors: Africa’s most developed economy is weighed down by anaemic growth and a huge current account deficit. Malcolm Charles, portfolio manager at Investec, says recent economic data have dented expectations of an improving trajectory.
“The dollar has been quite rampant so one would expect some general emerging market weakness. [But] if you draw down into the rand specifics, we haven’t had a lot of good news of late,” Mr Charles explains. “I’m more worried than I was a month or two ago, when we were expecting a slightly improved current account deficit and were quite confident that inflation had peaked.”
Kevin Lings, chief economist at Stanlib, a South African asset manager, traces the current bout of weakness to data this month revealing that the current account deficit had widened from 4.5 per cent of gross domestic product to 6.2 per cent of GDP. This was significantly wider than expected and illustrated that, in spite of lacklustre growth, imports remained high while exports were worryingly low.
The hope had been that exports would pick up following the end of two highly damaging strikes – the first a five-month dispute in the platinum sector, the second a weeks-long stoppage by more than 200,000 metalworkers and engineers that affected thousands of companies.
It’s hard to make a forecast that says that the rand is going to strengthen back to fair value– Kevin Lings, chief economist at Stanlib
The strikes pushed South Africa to the brink of a technical recession. Although growth recovered slightly in the second quarter, Mr Lings is concerned that the economy is not “rebalancing” in terms of exports and imports.
“It’s hard to make a forecast that says that the rand is going to strengthen back to fair value,” Mr Lings says. “We are going to struggle, for example, to raise interest rates significantly to draw in a lot of foreign flows because of weak growth and we are going to struggle to really unwind the current account deficit meaningfully.”
The rand took another hit when interest rates were kept on hold last week, a move that surprised some foreign analysts. At the same time, Gill Marcus, the respected central bank governor, announced she would not seek to renew her term when it expired in November.
That triggered some uncertainty as her successor has yet to be named. The foreign exchange market took the lack of clarity as a green light to sell. Few believe the sell-off will end any time soon.