South African Rand falls as recession, Emerging Market pressures bite

South Africa’s rand fell further against the dollar and equities market had a slow start on Wednesday as the economy entered recession and emerging markets pressures continue.

The rand was at R15.60 to the dollar at 9.30am, while the All Share Index of the Johannesburg Stock Exchange was down 1.39 percent to 57,089.6 points and the top 40 had already lost 1.55 percent.

The South African economy slipped into recession on Tuesday, with Statistics South Africa saying gross domestic product declined 0.7 percent in the second quarter. The economy had contracted 2.6 percent contraction in the first quarter of the years but hopes were high that the country would survive another recession, having staged comebacks in 2016 and 2017 after a quarterly contraction.

Analysts at market intelligence firm IHS Markit had in a note released in March expressed confidence that the South African economy will benefit from positive business and consumer sentiment following Cyril Ramaphosa’s ascent to power. The feeling at IHS is the same across the investment community but the poor performance of its agricultural, transport, communication and storage sectors ensured a second consecutive contraction in the economy. Pressure has also been exerted on the rand in the wake of financial turmoil in Turkey and Argentina.

In a short analysis on Twitter, Robin Brooks Chief Economist at the Institute of International Finance explained a correlation between countries like Argentina and South Africa whose currencies are under pressure.

“The intensity of flows to Emerging Markets means there are places with a big build-up of inflows relative to what the economy can absorb,” Brooks wrote.
South Africa
Chart shows cross-section of non-resident flows to EM in % of GDP.

“Argentina and South Africa stand out as having gotten a lot relative to its GDP. Places that received a lot of “hot money” as opposed to more sticky FDI are vulnerable,” Brooks added.

Hot money flows can be destabilising, leading to overvaluation of currency and ultimately making exports more expensive. The result is often a trade and current account deficit.

South Africa’s current account deficit had widened more than expected in the first quarter to 4.8 percent of GDP. The quarterly trade balance was also a deficit of R25 billion ($2 billion) as against a surplus of R74 billion rand.

“The value of merchandise exports was affected by both lower export volumes and lower rand prices as the external value of the rand strengthened,” the central bank stated in June.