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Strikes, downgrades shake rand

Oct 16 2012 19:29
Johannesburg - Violent strikes and credit downgrades have pushed the rand to its lowest level against the dollar in three years, and with further weakening expected Africa's top economy could face tough times ahead.

Even for a jitter-prone commodity currency these are turbulent days for the currency.

The unit began October around R8.30 to the dollar but has since grazed the R9.00 level, with analysts forecasting it could hit R9.25 by early 2013, a rate that would make imports painfully expensive.

Currency dealers have been spooked by a wave of wildcat strikes that have plagued South Africa since the beginning of August and curbed chrome, iron and diamond production.

"We see some of these strikes concluded, some other ones are still going on, then we hear that new workers go on strike," said Nicky Weimar, a senior Nedbank economist.

"It definitely has an effect on the rand."

"The longer it continues, the greater the economic damage. It is certainly not leading us to recession, but this is more the damage that has been done to the country's reputation that concerns us," said Weimar.

The market's ill sentiment has been underscored by downgrades from the world's top two rating agencies.

Both Moody's and Standard & Poor's (S&P) are also keeping their outlook "negative", suggesting more downgrades to come.

The third global agency, Fitch, is expected to weigh in during the next few weeks.

Analysts attribute the lack of political leadership to the ANC's leadership congress in December and President Jacob Zuma's lobbying for re-election.

Standard and Poor's fears "the ANC will take on board more populist elements for its policy framework in the lead-up to the 2014 presidential elections" to "ensure the continued support of the trade unions," S&P said.

Meanwhile the currency's actual downward spiral will continue, according to Citigroup analyst Coura Fall.

"The rand is going to depreciate gradually, with some volatility," she said.

Trade and current account deficits were cause for concern which could see the rand plummet to R9.25 against the dollar by next year, she said.

That could spell tough times ahead.

"Investor hesitation is particularly unwelcome at a time when the country's external and public sector funding requirements are so large," Standard Bank analysts said.

The government had hoped that external funding would pay for a series of major public infrastructure upgrade projects that would also eat into the sky-high unemployment rate, which officially stands at around 25%.

Meanwhile the Reserve Bank has openly expressed worry at capital flight and announced yet another reduction in its growth expectations.
downgrade  |  rand  |  strikes  |  dollar



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