Emerging market currencies suffered a fresh bout of weakness today as China posted some disappointing economic data. But key emerging markets have been struggling since the beginning of the year. That’s when the U.S. Fed announced that it would ease back on its bond buying program. The Turkish Lira slid to fresh lows as did the South African Rand.
The Rand, now trading at over 11 to the dollar and close to R18 against the pound, is at its worst level in five years.
John Cairns, currency economist at RMB, said, "The Rand’s primarily being driven by what’s going on in emerging markets. The domestic issues are a negative backdrop to that but certainly not a major driver. In fact RMB have gone away and looked at what’s been going on in some of these other emerging markets. There domestic problems are much, much larger than what we have in South Africa"
South Africa’s finance Minister believes there’s no need to panic as a weaker rand is welcome news for exporters.
“Firstly, we should be importing less but that isn’t happening unfortunately. Our current account deficit, our trade deficit is still very wide and I think that will persist unless until our exporters in particular can convince people in the developed world, we can supply on a sustained basis, globally, competitively priced goods,” Chris Gilmour, analyst of ABSA Investment, said.
But manufacturing output remains under pressure in SA. Government believes its a good time to ramp up production. However key export sectors like mining and fruit, are struggling with labour unrest.
"It’s catching a lot of negatives over and above just the general wave of poor sentiment and to that I ascribe things like the idiosyncracies that we currently have - things like shooting ourselves in the foot with strike, with political violence, that type of thing and of course in the lead up to an election. I think that will also serve to help to weaken the Rand," Gilmour said.
In the meantime the weaker rand will soon hit consumers that are already under strain from rising costs.
A weaker rand may be good news for exporters but not for consumers. The impact of the weaker rand will soon filter though into the prices of fuel and food adding inflationary pressure on the economy.
The ongoing labour unrest is making investors nervous. The IMF and the UN’s economic unit have also raised their concerns about rising unemployment.
Cairns said, "Continued Rand weakness would force the Reserve Bank to hike interest rates. We don’t think it’s gonna happen this week but eventually the Reserve Bank might have to hike interest rates which would dampen consumer spending and investment spending and so push GDP growth lower ."
The rand is unlikely to make a quick recovery. Experts believe the currency can be beneficial at this level, only if all sectors of the economy work at optimal levels.
Source: CCTV
