Drought, commodity prices hammer struggling Rand

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Windhoek

As the South African Rand hit its lowest level since 2008 on Monday, touching the 18 to one level against the US dollar before making a partial recovery, a local economic analyst said it is important to remember that the decline of the currency did not start with President Jacob Zuma.

According to Purvance Heuer, director of securities at Simonis Storm Securities, the decline of the Rand is more likely a result of lower international commodity prices, coupled with increased imports of soft commodities due to the ongoing drought in South Africa (SA).

“This has caused the trade deficit to widen. Additionally, investor confidence has slowly started waning due to a lack of economic reforms, specifically with regard to the rigid labour market. This has resulted in a steady flight of capital,” said Heuer.

He added that the devaluation of the Rand was further exacerbated by political risks in SA over the last few months with the appointment and then sacking of David van Rooyen as finance minister within a matter of days and then the reappointment of Pravin Gordhan. Subsequently, investment confidence worsened, leading to significant capital outflow.

Also commenting on the plummeting rand, investment strategist at Capricorn Asset Management, Suta Kavari, said: “Zuma speaks and the Rand tanks,” referring to the SA president’s comments on the sidelines of the African National Congress’ 104th birthday celebration, where he blamed the market turmoil and Rand tumbling on the market’s exaggerated reaction to his sacking of former finance minister Nhlanhla Nene.

“Duly taking its cue from the president, the Rand dived to new depths.  How’s that for an exaggeration?” Kavari asked. He further noted that the Rand’s plummet in Asia yesterday morning came about as the market turmoil in China and a drop in US equities deterred risk-taking, as investors’ dumped rands for dollars in a very illiquid market and then exchanging those dollars for Yen.

Kavari also noted that the US Dollar surged an incredulous 10.3 percent at one stage yesterday morning, pushing the USD/Rand exchange rate to a record 17.995 to one, which he described as “a massive move” from 16.315 to one at the close of the New York trading session on Friday.

“The Rand depreciated by 25 percent in 2015, hurt by the slump in commodity prices, uninspiring and rather dreary economic growth and rising US interest rates,” Kavari said.

Meanwhile, Heuer noted that South Africa needs to restore its financial stability by improving its terms-of-trade (value of exports vs. value of imports) and needs to strengthen its macro-economic reforms to protect the economy from global economic shocks.

“We will watch closely what will be said in the State of the Nation Address to find clues as to whether there will be any reforms. The country (South Africa) has certainly lost a lot of international investor confidence,” Heuer commented.

He continued by saying given that Namibia is a commodity exporting economy and that the Namibia Dollar is pegged to the Rand, the devaluation of the Rand would certainly worsen Namibia’s terms-of-trade.
“Said differently, the amount of money that would be derived from exports in relation to imports would decline. This would result in a continued widening of the trade deficit in Namibia. However, in absolute terms, exports would increase, while corporate earnings are likely to be negatively affected. In this regard, jobs in the primary sectors, such as mining, agriculture etc, are likely to be negatively affected,” Heuer added.

The Rand fell 25 percent against the US dollar towards the end of last year, declining sharply in December after Zuma fired the respected finance minister, Nene. Reports have also surfaced that SA business confidence has dropped to the lowest level since before Nelson Mandela came into power in 1994, according to an index released last week by the South African Chamber of Commerce and Industry.

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