How a ‘perfect storm’ pummeled the rand
The rand had another torrid day, slumping more than 3% at one point, after Moody’s Investors Service sounded a warning about the country’s finances and Reserve Bank governor Lesetja Kganyago said he is expecting a weak economy.
After being battered together with other emerging markets in the wake of Turkey’s financial crisis in the past week, domestic factors took centre stage on Wednesday, further undermining optimism from earlier in the year when President Cyril Ramaphosa replaced Jacob Zuma.
A report that shows retail sales grew below market expectations in June added to concern that SA is set for its first recession in about a decade, while sentiment was also hit as ANC chair Gwede Mantashe was reported as calling for restrictions on land ownership.
"We hit a perfect storm on the day," said David Shapiro, deputy chair at Sasfin Securities, who also cited the slide in the Naspers share price and falling commodity prices, which may hurt local producers who are already cutting thousands of jobs. "At a platinum price of $760/oz, local producers cannot survive."
Naspers, Africa’s largest company by market value, tumbled after Tencent, the Chinese company of which it holds 31%, missed earnings estimates.
The rand dropped as much as 3.5% to R14.74/$ and was 2% weaker at 14.5325 at 6.20pm on Wednesday, pushing its 2018 losses to 15%, after this week’s slide to a two-year low at more than R15/$.
Debates about property rights have dominated discussions on the country’s economic outlook since the ANC said it would seek to change the constitution to allow expropriation without compensation.
The rand dropped as much as 3.5% to R14.74/$ and was 2% weaker at 14.5325 at 6.20pm on Wednesday, pushing its 2018 losses to 15%, after this week’s slide to a two-year low at more than R15/$
"You shouldn’t own more than 12,000ha of land and therefore if you own more, it should be taken without compensation," Mantashe was quoted as saying to News24.
Wednesday’s drop came despite Turkey’s lira jumping more than 5%.
The warning by Moody’s on the nation’s finances raises the spectre of another credit downgrade, which would push rand-denominated bonds into junk status, forcing investors who only hold investment-grade assets to sell them.
"Growth this year is expected to be lower than the government’s own estimates, weighing on tax revenues, while the public sector wage agreement in June brings extra, unbudgeted cost," Moody’s vice-president Lucie Villa said in a report.
The credit ratings agency, which still has SA as investment grade, sees the fiscal deficit at about 4% of GDP in the year to March 2019, compared with the Treasury’s forecast for a 3.6% gap, which came before Ramaphosa’s recent announcement of a stimulus package.
Sources familiar with discussions around the package said it may cost about R43bn.
SA’s economic performance is expected to be "weak and choppy", Kganyago said in a briefing to parliament’s finance committee on Wednesday.
Comments in an interview with Business Day signalled the governor is in no rush to step in to stem the rand’s decline through higher interest rates.
A weaker exchange rate typically pushes up the cost of imported goods, increasing pressure on the central bank, which is targeting a 3% to 6% inflation rate, to raise borrowings costs. That would increase the distress of indebted companies and consumers.
"There is liquidity in this market and there is trading.
"You might not like the price … but the market is trading," Kganyago said.
The Bank in July left the repo rate unchanged at 6.5% and reduced its growth forecast for 2018 by 0.5 percentage points to 1.2%.
With Maarten Mittner