Worry for the rand

Michael Dynes

There seems to be little prospect of any let up in the tribulations faced by the South African rand. Shaken by political uncertainty at home, and battered by a daily barrage of domestic and international economic gloom, Africa's strongest currency appears to be tumbling towards lows not witnessed since 2001

Doubts over the fate of Jacob Zuma, the ruling African National Congress candidate for president in elections due in April who may be forced to step aside because of new corruption charges, a breakaway party that threatens to greatly augment political tensions, and fears of a general lurch towards the left would be more than enough on their own to trigger investor flight.

Add to this mix a global recession and the collapse of base metal prices on which South Africa is heavily reliant, capital flight by risk averse investors withdrawing funds to shore up ailing balance sheets at home, and declining domestic demand as consumers struggle to cope with interest rates of 12 percent, and you might think Armageddon is just around the corner.

This lethal combination drove the rand down almost 30 percent against the dollar and the euro during 2008 - a decline which shows no sign of abating. The currency has already lost another 5 percent of its value this year, and was trading at 10.10 to the dollar by the end of January. The recovery experienced in October was fleeting, and it now seems only a question of time before the rand breaches the historic low of 13.85 against the dollar recorded in 2001.

But just as every bubble must burst, so no downturn is ever lasting. Investors are looking to where the crisis began for the first signs of the proverbial green shoots of recovery. The optimists think that will not now begin to happen until the end of this year. The pessimists think the middle of 2010 is more likely. No one now talks seriously about decoupling - the somewhat premature notion that the developing world has grown so much that it no longer depends on what happens in the developed world.

When recovery does come, emerging markets - including Africa - are likely to play a bigger role than ever before. South Africa - and African economies as a whole, were growing at around 6 percent before the credit crunch hit, arresting growth in its tracks. Yet the factors which drove that growth - greater political stability, macroeconomic reforms, an under-borrowed banking system, low labour costs, an abundance of raw materials and an as yet unrealised agricultural potential - remain intact.

As risk aversion begins to subside, and panic-stricken investors regain their appetite for investment, Africa can be expected to figure prominently in their forecasts of potential high-growth regions around the world. South Africa's currency, equities and bonds have been left seriously undervalued by the current economic turmoil - as is the case with much of the rest of Africa - and are therefore a steal for anyone brave enough to dive in and hold out until the upturn arrives.

A strengthening rand, whose wild fluctuations have historically acted as a rough barometer of the state of the world economy will, along with a recovery in the US housing market and the relaxation of credit lines, be among the first signs that recovery is finally on its way.