The South African rand. Picture: REUTERS
The South African rand. Picture: REUTERS

The rand extended losses at lunchtime on Tuesday, after the South African economy slipped into a technical recession, striking a severe blow to the "new dawn" narrative championed by President Cyril Ramaphosa

The rand fell as much as 2.5% to R15.26 to the dollar, its weakest level in about three weeks, making it the worst performer among emerging-market currencies on the day.

The contraction in the local economy had a domino effect on banks and other stocks that largely depend on its performance.

Diversified industrial group Bidvest, which has a wide footprint across the economy, fell 5% to R203.16 on the JSE. Retail stocks were down between 2% and 4%.

The developments come at the worst possible time for the rand, which is also reeling from poor sentiment towards emerging markets. The weak state of the local economy and weaker currency will likely put the Reserve Bank in a tight corner when its monetary policy committee meets later in the month to decide on interest rates.

Its meeting will take place against the backdrop of rising inflation, which hit its highest point in nearly a year in July, raising the potential for higher interest rates. Inflation rose to an annual rate of 5.1% in July, which is in the upper limit of the Reserve Bank’s target band of between 3% and 6%.

"The economy remains lacklustre, and the rand is struggling to gain any meaningful momentum towards stronger levels as the emerging-market crisis and subdued local performance weighs heavily on sentiment," said Bianca Botes, analyst at Peregrine Treasury Solutions, in an e-mailed note to clients.

The economy contracted 0.7% in the second quarter, tipping it into a technical recession, which is defined as two successive quarters of contraction. The economy contracted 2.6% in the first quarter.

At 12.36pm, the rand was R15.21 to the dollar, after plunging nearly 11% in August, which marked its biggest monthly drop in more than two years.

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