Rand needs to time to recover from record lows
The rand slumped to a level of R17.99 against the US dollar on Sunday night after erratic trading.
JOHANNESBURG - Experts say domestic and global issues have affected the rand and it may take some time before it strengthens against the US dollar.
T he rand slumped to a level of R17.99 against the US dollar on Sunday night after erratic trading on the Asian markets.
The rand recovered the next morning to around 16.70.
Chief economist at Econometrix, Azar Jammine, said there's also been a general lack in confidence in the leadership of the country and the rand may have been affected by some of President Jacob Zuma's statements over the weekend.
"He spoke about land having been stolen from blacks which could have been interpreted by international investors as a much stronger statement on potential land reform than previously."
Jammine said the rand has also been affected by the general decline of confidence in South Africa's leadership.
"That has cast doubt on the ability of the leadership to maintain fiscal discipline and there has been a loss of confidence in the ability of National Treasury to continue reflecting the kind of stability in our government finances that we have done in the past."
While South Africans have been urged to spend wisely due to the weakening rand, some economists say things could improve in this environment.
Economist Kevin Lings said while there's a negative sentiment about the financial situation, there are some who will benefit from the weaker rand.
"Many foreign investors may take a view that the currency offers some value at these levels. Equally there're businesses in South Africa that benefit from a relatively weak exchange rate as imports become more expensive, local businesses will look to try and source those items domestically. Again that provides opportunity for local industry."
Asia expert Matthew Birtch said China has competent leadership and the situation will improve.
"Many political and economic analysts believe that the head of the reserve bank in China is one of the best central bankers that exists globally. There is a struggle at the moment but a confidence internally in China as things start to take place."
The rand has been wobbly since Zuma plunged Africa's most industrialised economy into uncertainty in December by firing Finance Minister Nhlanhla Nene in what some analysts saw as a sign of strife within the ruling African National Congress.
In an about-face, Zuma removed Nene's little known replacement within a week, returning former Treasury boss Pravin Gordhan to the post, but investors are now uneasy over the prospect of undue political interference in economic policy.
This was evident on Monday, when the rand took one of the biggest currency hits from a wave of global risk aversion spawned by the China worries.
"The rand to some extent is reflecting a lot of investor concern surrounding the future of policymaking decisions and given the finance ministry debacle at the end of last year," BNP Paribas Cadiz Securities economist Jeffrey Schultz said.
Zuma said after an ANC rally at the weekend that financial markets had over-reacted to his decision to sack Nene.
But critics say his speech was another sign of the government's failure to tackle structural weaknesses that have kept annual economic growth below 2 percent for the past five years and have led to credit rating downgrades.
"Local sentiment remains poor and the fact that this weekend's ANC conference did not address investor concerns, suggests that these fears could persist," Barclays Africa currency strategist Mike Keenan said in a note. "The underlying rand mood remains extremely bearish."
Government bonds fell heavily on Monday, and the yield on benchmark paper due in 2026 jumped 16 basis points to a month's high of 9.685 percent.
Stocks fared better, led by gold shares as the weaker rand boosted the price of bullion in local currency terms.
The benchmark Top-40 index rose 0.53 percent to 43,482.54, while the All-share gained 0.45 percent to 48,322.68.
The ANC has rallied around Zuma after the finance minister episode, rejecting calls for him to stand down.
But analysts say this could cost it votes in the municipal elections as the ANC's mainly black supporters accuse Nelson Mandela's liberation movement of not doing enough to lift them from poverty since ending white rule in 1994.
White South Africans, on the other hand, feel they have become scapegoats for an economic downturn resulting mainly from poor governance, raising racial tensions that have played out on social media since the start of the year.
DROUGHT ALSO WEIGHS
As the political and economic outlook sours, the rand has already shed more than seven percent of its value since the start of 2016, adding to a 25 percent decline last year.
This, coupled with rising food prices as a drought in southern Africa takes its toll, will fuel inflation, putting pressure on the South African Reserve Bank (Sarb) to raise interest rates even as economic growth languishes around 1.5 percent.
Monetary policymakers have said they would not intervene directly in the market to influence the rand exchange rate, but raised rates by 50 basis points last year to curb inflation.
"The way things are unfolding (means that) decisive action will need to be taken, most likely by the Sarb when they meet later this month," Bidvest Bank said.
"Rates need to rise to stem the tide of negative speculative activity and for that to happen the Sarb needs to be bold."
Additional information by Reuters