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Five reasons why the rand is weak

Mar 12 2015 13:42
Carin Smith

Cape Town - The rand is an emerging market and commodities currency and its depreciation by more than 25% on a trade weighted basis should be seen against that backdrop, Goolam Ballim, chief economist of Standard Bank, told Fin24 on Thursday.

"SA's situation is cyclically and structurally precarious, but when one gets to the edge of an abyss, you are forced to reflect," he said.

READ: Weak rand begs for govt intervention

Reasons Ballim said are impacting the rand at the moment:

1. Commodity prices have been weak and the rand is a commodity currency;

2. In an environment where China is unlikely to stoke commodity prices the rand is unlikely to become stronger;

3. The rand is undervalued;

4. SA's current account deficit will remain sticky over the near to medium term; and

5. Of course, a stronger dollar.

READ: Rand jumps more than 1%

"If SA does not create an investment climate by addressing electricity woes and creating a more harmonious labour market, we will continue to forego market share and face an increasingly closed global export market," warned Ballim ahead of the start of the GTR Africa Trade Finance Week in Cape Town.

"This will lead to tepid growth and export malaise.

"We have been quite bearish on the rand, therefore, unsurprised by its current state. Over the near to medium term the dollar is likely to continue to ascend and lead by default to rand weakness."

The dollar has been trading weaker than its average over the last couple of decades, but after the financial crisis the US introduced monetary policy stimulation.

"We suggest that until 2014 the dollar strength was obstructed by the Fed's [Federal Reserve] liberal money supply policy, but now it is getting out of the way of the dollar.

"Secondly, in terms of growth, capital follows growth. We think the US can grow well over the next few years - for instance compared to Europe - and this speaks against the emerging market currencies and the rand in particular.

ALSO READ: Rand stronger but still near 13-year low

standard bank  |  goolam ballim  |  rand  |  sa economy


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