12/10/2000 17:07 - (SA) Rand hits a new low

Mariam Isa

Johannesburg - The rand staggered to another record low against the dollar on Thursday, as concern over weak economic fundamentals added to anxiety sparked by chronic euro weakness and regional politics.

The currency stood at 7.48 just after eight in the evening and 11.0016 against the British pound. At the closure of markets in Johannesburg, the rand had firmed to 7.4350 to the robust US unit after sinking to a fresh low of 7.45 earlier in the afternoon session - a decline of over 3% in the past week and 19% over the year so far. But after the close of markets in Johannesburg, the South African currency started sliding again and was hovering around 7.46 level before slipping to a new low of 7.48.

More ominously, the currency has also weakened against key crosses in the past few days, with traders citing the economy and regional politics as factors behind its recent slide.

Since last week, the rand has weakened by around 3.4% against the pound and 2% against the euro, which together account for 50% of its trade-weighted index.

"This is genuine African and emerging market pessimism," a despairing foreign exchange trader at a South African bank said.

"The rand is in trouble. It's fundamental weakness, not just dollar strength," he said. Traders say that in the next few weeks, the rand is likely to head for 7.46 to the dollar, with 7.63 and 7.90 feasable long-term targets.

But in the very near term, it is likely to recover to 7.37 or 7.35 to the dollar in a correction not expected to last.

Most of the currency's slide this year has been attributed to external factors like the strength of the dollar, in which most of the country's imports are denominated.

But in the past week, contagion fears related to the political and economic crisis in neighbouring Zimbabwe have resurfaced, reminding players of the steep toll it took on South African markets during the second quarter of this year.

GROWTH SLOWDOWN STARTS TO AFFECT RAND

And for the first time since the start of the year, disappointment over sluggish economic growth and low levels of foreign direct investment have begun to take a toll on sentiment.

"There has been a growing sense in the market that growth this year is going to disappoint because of the impact of floods earlier in the year and the slow recovery of consumer demand," Standard Chartered emerging market economist Razia Khan said.

"South Africa does have considerable problems and in growth terms is going to lag behind other emerging markets - it's adding to the gloom in the market from the weak euro," she said.

Finance ministry officials have acknowledged that economic growth will fall well short of the 3.5% average expected for each of the coming three years. Foreign direct investment amounts to a paltry one percent of gross domestic product.

On Tuesday, central bank governor Tito Mboweni made a plea for further economic reforms which he said were needed to make South Africa more attractive to foreign investors and boost growth to higher sustainable levels.

"Foreign investors are looking at South Africa in a very different light - they don't want to put their money here. Zimbabwe is one of the problems," ABN AMRO economist Colen Garrow said.

In the past year, foreigners have become net sellers of South African bonds while inflows into equities have shrunk.

If recent falls in US shares become a full-scale rout, analysts believe that sentiment towards emerging markets in general, and South Africa in particular, will sour even more, putting more pressure on the rand, analysts said.

Adding to the negative sentiment was news on Wednesday that the estimated cost of a South African arms procurement deal has leaped by nearly 50% to $5.94bn while the benefits in terms of offset deals would provide little to the economy.

http://news.24.com/News24/Finance/Markets/0,1466,2-8-21_925280,00.html

-- Martin Thompson (mthom1927@aol.com), October 12, 2000