Rand may buckle as SA's problems pile up

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NewRandMoney Reuters.

London - South African Finance Minister Nhlanhla Nene has a lot on his plate, and the enormity of those challenges may weigh on the value of the rand.

Growth is weak, inflation is picking up, not least because of the lagging impact of previous rand depreciations, household debt is high, new power stations need to be built and a bank bailout needs to be paid for.

The rand has strengthened to about 10.62 to the dollar from 10.83 on August 8, though it has held in a 10.47-10.86 range since the end of May.

Yet each of these factors in the finance minister's inbox could push the currency lower.

First, growth.

The central bank last month cut its 2014 forecast for economic expansion to 1.7 percent from 2.1 percent in May.

“The growth of the South African economy is not sufficient to address our challenges of poverty, inequality and unemployment,” Nene said on Monday.

Next, there is the weekend's $1.6 billion (R17 billion) rescue of African Bank Investments (Abil), launched by the central bank.

The bailout saw share prices in other local lenders rise on Monday, but it also put the spotlight on another problem South Africa must tackle.

Abil almost exclusively focused on selling unsecured loans, which are not backed by collateral, and has been hit by rising bad debt.

The reality is that South African household debt averages around 75 percent of disposable income, so servicing that is a huge burden for low-income households, where food alone accounts for one third of expenditure.

Servicing that debt burden will only become harder when inflation rises following the July 30 decision to allow South African power utility firm Eskom to raise electricity prices above the 8 percent previously granted.

Wage inflation expectations are already “uncomfortably high,” South African Reserve Bank Deputy Governor Daniel Mminele said on Wednesday.

Also, the “lagged impacts from past depreciations” of the rand are “starting to feed through into consumer prices,” Mminele added.

Year-on-year consumer price inflation was 6.6 in June, unchanged from May and its highest since July 2009.

Higher inflation prospects are not only bad news for South African consumers, they could also feed into a weaker rand if investors get nervous about South Africa's prospects.

Eskom is itself a potential headache for Nene, as it is committed to spending 300 billion rand on new power generation plants, money that has to come from somewhere.

Keeping South Africa's lights on is paramount but it will come at a cost.

Talk of privatisation of Eskom was denied by South Africa's Minister of Public Enterprises, Lynne Brown, on August 5.

Assuming not all the money needed by the power utility can be raised from external sources, then there will be some pressure on South Africa's public purse.

“The expenditure ceiling identified in the last budget remains in place and if this proves insufficient, additional measures will be considered to meet our fiscal objectives,” Nene said on Monday.

 

RATING

If South Africa's Finance Ministry does have to accept higher public expenditures, that is likely to alarm the rating agencies.

Standard & Poor's cut South Africa's credit rating to BBB- on June 13 while Fitch affirmed its BBB rating but changed its outlook to negative from stable.

Moody's reaffirmed South Africa's Baa1 government bond rating on July 17, maintaining a negative outlook, but said the rating could be vulnerable to a “negative trend in the government's fiscal and debt trajectory.”

If circumstances do dictate that South Africa's expenditure ceiling is materially breached, Moody's analysts and others will doubtless pay close attention.

South Africa's climate may be heading into spring but the rand may be riding for a fall. - Reuters



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