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Weak Rand means a Weak SA

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The Rand Tumble
1. Continued ripples of World financial crisis
2. Greece stress the fate of Europe
3. China has a slow-down in demand for goods
4. Bad China data
5. Asian Stock Markets sell off
6. Commodity prices start to drop
7. World Markets drop
8. Emerging Country Stock Markets tumble
9. Currencies falter
10. Rand cracks under the pressure of Emerging markets falling Commodities

Why the Rand has weakened
The Rand melted over the weekend, on Monday morning Traders woke up to a sell-off in the local currency. The Rand movement to a multi-year dip of almost R14 to a US Dollar (USD). We noticed that world currencies and stock markets were in sell-off mode.  Our currency tumbled and the JSE was in sell mode. Among a basket of  25 Emerging market currencies the rand was the worse hit, it appears to be a a trigger sell during trying times. Our currency is easily traded and when traders want to exit emerging markets they use the Rand as mechanism. Other liquid emerging market currencies are the Russian Ruble and the Brazilian real, however the rand is still the most liquid of the emerging market basket of currencies, which always results in our currency always being wiped.

The local unit was already down about 15% this year because of a smorgasbord of reasons, the recent further dip comes about because of China , Commodities and Greece.

The ripples of the Global Financial Crisis continues to darken economies. An unsettled Greece and their inability to repay government debt has festered the EU economy. We have seen a ‘musical-chair’ Government in Greece carving a  weaker Europe.

Across the water China has had a difficult time dealing with reduced demand from a weaker world economy. They have enjoyed years of huge economic growth and have been the manufactures of many countries. A less prosperous world has resulted in China recording a reduced GDP. Their market place activity is slower, they are demanding less raw materials in particular less Commodities.

South Africa is a commodity and resource driven Economy , if the price of metal drops then we see less action in the domestic market. This translates in a lower GDP locally. The mines have recently laid off workers because of the slide in Commodity prices, the sharp fall in commodities now may record less activity and signal another round of job cuts. Where one industry suffers with job losses the negative effect is felt in many quarters of the economy. Currently we battle with an unemployment level of 25%, a higher number of unemployed people applies stresses on the our fragile business environment.

Some of our local problems have also been cited as contributory factors a slow down in growth and Eskom power disruptions may well have contributed to the dour financial climate, this has had a massive disturbance for regular business. While factors around political corruption and comments on management of the country have also been echoed, these factors have a minor impact on the rand, the other  factors including China and a reduction in commodity prices appear to be the major reason.

The effect of a weak Rand
Imported goods are expected to cost more, this is not only luxury goods , it includes much of the finished goods that we consume daily ranging from technology to tiles. South Africa exports much of our resources, while demand is likely to be dramatically lower and the prices of this commodities worse off. We are likely to observe a reduction in both the dollar value of Imports and Exports.

The further impact is expected to be a steep rise in Inflation, we have already noticed that many of our imported goods have cost more, unfortunately there will be a spike in the prices of goods on the the shelf. Inflation is one of the signals that the South African Reserve Bank uses in deciding on Interest Rate moves. The position of a South Africa in slow growth mode, with rising inflation unfortunately translates to an interest rise in the order of 50 basis points or a half a percentage point, according to a recent Reuters poll. The next Reserve bank meeting in September, may be the time that the Monetary Policy Committee decides to up the rate.

Compounded to this is the petrol price which has both the rand and oil price as the 2 big components. While we have enjoyed a dip in crude oil prices, the weaker rand may tilt the scales to a higher net effect for the petrol at the pump.

The National Treasury borrows large tranches of Dollar debt from international markets, this debt must be repaid in USD and, given the recent movements the repayments will also include slightly higher interest repayments as emerging markets are out of vogue and considered more risky.

A lower Rand is a reason of real concern, it hurts consumers in the pocket. We have lived through a period of weak currency during 2001/2 and the impact was that of national strive resulting a slow down in almost all sectors, the period thereafter was one of growth an expansion. If this is to be the worse move of the currency, then the pain that we experience may be short lived before the dawn of an economic up-turn.

Written by Advocate Lavan Gopaul, Head of MANCOSA Business Nexus Unit

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and opinions of MANCOSA.

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