Picture: REUTERS
Picture: REUTERS

The rand extended its drop against the dollar on Tuesday after a report showed manufacturing production contracted for a fifth consecutive month, adding to the gloomy outlook for a domestic economy that is in the throes of load-shedding.

The rand dropped as much as 0.8% to its weakest level since November 27 against the dollar after Stats SA said output fell by 0.8% in October compared with the same period in 2019. While this was better than the 2.7% drop forecast by analysts in a Bloomberg survey, it marked the longest stretch of declines since the global financial crisis, the news agency said.

The rand has weakened 1.1% since the end of last week. It fell on Monday evening after Eskom said it would implement the highest stage of load-shedding so far, heightening concern that the economy could slip into another recession.

While Eskom later downgraded the expected load-shedding to stage 4, from stage 6, which would have meant removing 6,000MW of power, the blackouts have heightened the risk of a recession. That in turn could see Moody’s Investors Service lose faith in the country’s ability to fix its finances, given the hit to tax collection that would result.

A loss of the country’s last remaining investment grade could lead to billions of rand flowing out of the bond market, weakening the currency and pushing up the cost of borrowing as reflected in bond yields.

“With stage 6 being downgraded to stage 4 and upcoming risk events in the form of central bank decisions [European Central Bank and US Federal Reserve], local data and the upcoming UK elections all in play, investors may well stay on the sidelines for now,” Mercato Financial Services analyst Nico Du Plessis said.

By 2.30pm, the rand had weakened 0.8% to R14.7917/$ after closing at R14.6805 on Monday. It had weakened 1.1% to R16.4099/€. 

The R2030 government bond was weaker, with the yield rising five basis points to 9.219%. Bond yields move inversely to their prices.

mjoo@businesslive.co.za

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