The rand continued to weaken against a basket of major currencies and lost two per cent in its weakest level in six months — this week. This, after weaker-than-expected manufacturing production in April and weak first quarter economic growth was reported.
Interest rates hikes are also expected in the U.S. and EU next week — which may strengthen the dollar further and see money flowing out of emerging markets.
The Rand and other emerging market currencies were hard hit over the last few months on expectations that U.S. interest rates will raise. The rand was trading at R13, 22 to the U.S. dollar — and R17, 75 against the pound.
Econometrix Chief Economist, Azar Jamine explains, “… In South Africa’s case the news has been exhibited by news of weaker than expected GDP growth. And the manufacturing production which has led to the belief that the hype around the election of Cyril Ramaphosa as President and its impact on the economy is likely to be a far more longer term issue than the short term – which is still a very much low economic growth.”
Galileo Capital’s Warwick Lucas says, “We’re really getting an emerging markets knock here. So it’s not so much commodity related. Particularly emerging markets being concerned about those US interest rates. We saw some strong growth in the US and the GDP data now coming out of the regional Feds is looking for strong economy again and Trump talking about more tax cuts in the later year.”
Jamine says it’s difficult for the five investment envoys appointed by Cyril Ramaphosa to generate a turnaround in the South African economy in a hurry. He says this is yet to yield any positive results for investors.
“It’s going to take a long, long while for investors to find it more attractive to invest in South Africa as opposed to other countries. And they will want to see that actual implementation of a series of actions to restructure the economy towards higher economic growth. At the moment there is a huge push back on Ramaphosa’s attempt to take the right kind of action and this is disillusioning a lot of investors.”
The rand lost nearly 4 per cent of its value against the dollar this week. The weaker currency will put the Reserve Bank in a difficult position as inflation will likely pushed up wards.