SA’s rand dilemma

Reserve Bank running out of options

THE RAND’S continuing slide has painted the SA Reserve Bank into a corner as the wobbly currency now looks set to damage business confidence further. The slide also complicates the central bank’s fight against inflation, raising concerns about its ability to keep a lid on price pressures, while at the same time trying to give the sputtering economy a boost.

The currency yesterday fell to fresh 14-year lows against the dollar, and hit a record low against the British pound. The Reserve Bank’s monetary policy committee is scheduled to meet next month, a week after the US Federal Reserve’s own policy meeting in Washington.

Today, the Fed releases minutes from its Federal Open Market Committee meeting of July 28-29, which might shed light on whether the Reserve Bank was justified in raising interest rates by 25 basis points on July 23. Since that hike, the rand has dropped 4.2 percent. On a 52-week basis, the rand is down 21 percent.

Theoretically, rand weakness should be a boon for exporters, but manufacturing is in recession and power cuts have forced the mines and other big industrial users to pare down production.

While the Reserve Bank has made fighting inflation its core focus amid expectations that it could breach the upper end of its 3 percent to 6 percent target range by the first quarter of next year, more immediate threats to the outlook are the rand’s continued slide, fallout from the energy crisis, looming job losses in the mining sector, ructions on the labour front and the deterioration in the Chinese economy.

Annabel Bishop, the chief economist at Investec in South Africa, said the rand was “firmly in the down case”.

“In the market’s view the down case is currently prevailing,” she said, adding that increased risk of strike action in the gold and coal sectors, the spectre of higher domestic interest rates in a low growth environment, increased chance of a sovereign rating downgrade and increased chance of recession were among the factors driving negative sentiment.

Making the Reserve Bank’s position more difficult is also an expectation that the Fed might opt to delay raising rates until December at the earliest as authorities sought to mitigate the effects of a strong dollar on US growth, or partly as a response to the yuan devaluation. Even so, analysts say the Reserve Bank would still be left with little room to manoeuvre as it has already telegraphed its rate-hiking stance.

The rand’s slide is not only inflationary but also indicates the souring sentiment towards emerging markets, and is the opposite of what the Reserve Bank had intended.

Foreigners have sold off R2 billion worth of South African equities since July 23, the day of the Reserve Bank’s first rate hike in a year. They have also sold off R1.2bn worth of South African bonds.

Commodity hit

Yesterday, commodity prices continued their recent slide, while investors pummelled Chinese shares.

Benchmark copper prices slid to a six-year low. Brent oil futures edged closer to a sixmonth intraday low touched last week.

Platinum is now down 31 percent from a year ago, and gold has slid 14 percent.

A serious hiccup in the Chinese economy would be bad news for South Africa, which relied heavily on Chinese demand for its minerals.

Last week Chinese authorities added to the uncertainty in the market place by devaluing the yuan in a shock move to stabilise the economy and make Chinese exports cheaper. The move has sent shockwaves through the markets and even raised fears of a currency war.

Nedbank economist Isaac Matshego said he expected the Reserve Bank to hike interest rates by another 0.25 percentage points next month.

The impact of another hike would severely add to the strain South African consumers are facing amid rising electricity and food prices.

The rand slipped by 0.2 percent to a 14-year low of 12.9709 in yesterday’s trading. It hovered around R12.94 at 5pm.

A run below R13 per dollar could trigger technical selling, adding to the currency’s woes.

Moody’s Investors Service senior vice-president Marie Diron said countries such as Brazil, Turkey and South Africa were all at risk as local political concerns added to broader pressure on developing economies. – With additional reporting by Reuters and Bloomberg. Follow Ellis Mnyandu on Twitter: @Ellis_Mnyandu

In the market’s view, the down case (for the rand’s future outlook) is currently prevailing.