The Investor SA

16 March,2015

Martin Barwise

 

-The Rand continues to lose its value against the ever-growing U.S Dollar-

 

For  the  South-African  economy, Friday the thirteenth was indeed a day of

horror, as the Rand value fell to its all time low in 13 years. According to the

British spread-betting  company, Capital Spreads, the Rand traded at an all

time  low  of  12.5271 per U.S  dollar  on  Friday  the  thirteenth   of   March

between 14:00 and 15:00. The Rand increased  to 12.5271  per  U.S Dollar

from 11.53 in February earlier this year. Showing  a deficit of 1.42 % over a

period of  one  month. This  is  the  South-African  Rand's  biggest  downfall

since  2002. Investors  seem  to  believe that the sole reason for the Rand's

downfall, is the riskier emerging market assets that is falling under pressure

from increased expectations that  the Federal Reserve could raise rates, by

the middle of  this  year. Others  believe  that  the  rand  took  the  brunt  of

investors' exit  from  emerging  market because of its long-standing budget

and current account deficits.

 

"It  remains  a  dollar  scenario. The  dollar  is  just  not  stopping, emerging

markets in general are under  huge  pressure" said  Ion  de  Vleeschauwer,

a   currency  dealer  at  Bidvest  Bank.  Vleeschauwer  also  said   that   the

13.00  per  dollar  will  be the next target for the market to chase, and looks

like it's going to be achieved without much hassle.

 

The South-African Rand averaged 4.98 from 1972 up until 2015. This just shows how quickly the rand escalated to  an  all time low over the past couple of years, considering  that  the  Rand  has  exceeded  the  6.00  in  2005. The Rand has depreciated by over 100% over the last 10 years, averaging a depreciation of 10% a year. The Rand reached an all time high of 12.52 in March 2015 ,whilst its  record  low of 0.67  was  recorded back in June 1973. Goolam Ballim, chief economist of Standard Bank, gave 5 reasons to why the growth of the South-African rand is depreciating:

1. Commodity prices have been weak and the Rand is a commodity currency.

2. In an environment where China is unlikely to stoke commodity prices, the rand is unlikely to become stronger.

3. The Rand is undervalued.

4. South-Africa's current account deficit will remain sticky over the near to medium term.

5. Of course, a stronger dollar.

 

"With little in the way of data today, (dollar) performance will continue to drive the (rand) and, in turn, local yields" -Barclays Africa-

 

If South-Africa should fail to  create an investment climate through addressing  the  electricity challenges and creating a more harmonious labour market, we will  continue to forego  market  shares  and  face  an  increasingly  closed  global export market. This would be a blessing in discuise

for the  Zimbabwean economy. Zimbabwe sees  the falling rand as potential growth for both individuals and Zimbabwean companies. Zimbabwe, which  is  a  net  importer of  goods from South Africa, and uses the much stronger currency, the U.S dollar , is  set to benefit from the weakening rand value. Zimbabwe's import bill from South Africa stood at 2.5 billion dollars in November 2014. "If we are to maintain the same quantities, our import bill will certainly come down and this will go a long way in easing our current liquidity crunch" said a Zimbabwean investment analyst.

 

Most of  the  processed  goods  in  Zimbabwean  supermarkets  are

imported  from  South-Africa, with the country's largest exporter, OK

Zimbabwe, importing more  than  70% of  its  groceries  from  South

Africa. TM Supermarkets, OK's biggest competitor, also sells mostly

imported goods as it's  partly  owned  by  South- African  retail giant

Pick 'n Pay. "South -Africa's credit is unlikely  to  change  at  another

review in June or in the next 24 months, but an electricity crunch will

shave  0.3%  of  this  years  economic  growth"  claimed  Standard &

Poors. Traders prefer to focus on underlying economic weaknesses,

including  chronic  electricity  shortages  and  labour  unrest.  Surely,

wage demands from  the  public  sector, which  are  way  above  the

inflation rate, and  funding  to the cash-strapped power utility Eskom

are  a  risk  to growth.  Primarily, structural weaknesses and  energy

shortages are the main reasons to why we have a  weak outlook on

growth. Eskom has struggled to  meet  electricity demands because

of a lack of funds to upgrade its  ageing  infrastructure, forcing  it  to

implement controlled  power  outages to prevent the grid from being

overwhelmed  in  the  worst  power  crisis  since  2008.According  to

Barons.com,  these  are  the  three  main  areas  that  influence  the

growth to the U.S's economy and its ever-growing currency:

1. The U.S  is currently  displaying the best momentum relative to its

trend  growth  pace, according  to  other  major economies. The U.S

has grown a healthy 3% in the third financial quarter of last year, following a 4.6% growth in the second. This , in contrast to the Eurozone, China and Japan, have shown signs of relative stagnation  over the summer. Traditionally, fast growing economies have rising currencies due to capital inflows.

2.The Federal Reserves looks set to increase interest rates in 2015, unlike the  European Central Bank

or  the  Bank  of  Japan. All  other  things being equal, investors like  to  hold  their  assets  in  whatever

currency   pays    the    highest    short    term   rates. While    short    term   rates   are   close   to  zero

across  the  developed  world  today,  expected rates hike from the  Federal  Reserves  should  change

this  over   the  course  of  2015. If  investors  expect  the   dollar  to  be  in   favour,  then,  because  of  

higher    rates,   it    makes    sense   to   buy   dollars   today   to   take   advantage   of   the   expected

appreciation.

3. The  Shale  energy  revolution  is  having  a major impact in reducing the U.S trade deficit. To put this

in perspective, in 2005, the U.S consumed  20.8  million   barrels   of   petroleum  products   a   day,  of  

which  12.5  million, or  60 %  had  to   be imported. In 2013, the U.S consumed  19.0 million barrels, of

which 6.6 million, or 35%, were imported. By 2015, the U.S will  consume 19.1 million  barrels, of  which

just 4.1  million  barrels, or 21 %, will be imported. In other words, while the long term trend  is  startling,

even the increase in  domestic  production   between 2013   and   2015  could  save 2.5 million  barrels

per day. At $ 90 a barrel, the U.S would cut roughly $80 billion from a $480 billion trade deficit. This is a  clear  positive for the U.S dollar.