Johannesburg - South African financial markets went into free-fall yesterday, sending the rand to record lows against the US dollar and the British pound, while the JSE edged toward bear market territory as investors dumped emerging market assets on concerns about the health of the Chinese economy.
The growing spectre of a tit-for-tat global currency war compounded the turmoil in the world’s markets, helping boost the safe-haven allure of the US dollar and treasuries.
The volatility in the rand left the SA Reserve Bank with a tough choice to make regarding the extent to which it can keep raising interest rates while trying not to push the economy off a cliff with higher borrowing costs.
The rand swung wildly in volatile trade yesterday, and hit a record low of R14.0682 against the US currency in early trade as the appetite for riskier assets continued to wane. It had traded at R12.93 late on Friday.
The currency slide yesterday capped a drop of more than 10 percent in the rand since the Reserve Bank had raised interest rates by 25 basis points on July 23, as markets anticipated that the US Federal Reserve would start hiking its interest rate from September.
The rand was one of the biggest losers among emerging market currencies, including the Turkish lira, the Indian rupee, the Brazilian real and the Russian rouble.
“It’s a global currency crisis,” Azar Jammine, a director and chief economist at Econometrix, said. “Since China devalued the yuan, the currencies of emerging markets have come under pressure.”
He said ructions in global markets were inevitable as asset prices in emerging and developed markets had reached bubble proportions amid a wave of easy money brought on by low interest rates.
Even so, the biggest headache for investors was the health of the Chinese economy, Jammine said. He added that he was among people who now doubted China’s professed growth rate of 7 percent.
“There are fears that China is going to slow down more than people initially expected. If there’s a hard-landing in China, there’s every reason to be worried because the Chinese will devalue the yuan further,” he said.
On Wall Street, the Dow Jones industrial average shed more than a 1 000 points, a historic intra-day slide. The blue chip index has never lost more than 800 points in a day. All three major US indices – the Dow, benchmark S&P 500 and the Nasdaq composite – are now in a correction: down 10 percent or more from their most recent closing records.
Inflation risk
In response to Business Report’s request for comment, the Treasury said: “The weaknesses of the rand against the dollar is broadly in line with the changes in other emerging market currencies.”
Treasury spokeswoman Phumza Macanda said: “The knock-on impact on inflation remains a risk that the SA Reserve Bank is monitoring closely as it follows its mandate on inflation. Furthermore the implication will also depend on how large and how sustained the shifts in the trends in the currency are.”
A currency crisis is the last thing South Africa needs as it confronts the prospect of massive job losses in the mining sector amid declines in the prices of some of its major mineral exports.
Year-to-date platinum prices have dropped more than 18 percent. The Bloomberg commodity index fell almost 2 percent yesterday, and headed for the lowest closing level since 1999.
Brent crude slipped below $45 (R583) a barrel for the first time since March 2009, while a barrel of US crude traded at $39.18. Copper lost 2.6 percent.
Meanwhile, Chinese stocks tumbled further, with the Shanghai composite index sliding 8.5 percent, while Hong Kong’s Hang Seng index fell 5.8 percent.
The JSE all share index yesterday was down 15 percent from a record closing high set in April. The sell-off on the JSE was broad-based but shares of commodity companies dominated the losers’ board, along with those of consumer oriented companies, including clothing retailers, cellphone operators, big industrial manufacturers and financial services firms.
More than $5 trillion has been erased from the value of global equities since China unexpectedly devalued the yuan, fuelling concern that the slowdown in the world’s second-largest economy may be deeper than previously thought.
Capital flight
SA Chamber of Commerce and Industry economist Richard Downing said the rand had exposed South Africa to capital flight. “The currency depreciation and the month-on-month volatility does not inspire confidence in South Africa as an economic and investment destination. Business confidence is already way below acceptable levels and we are now compounding the concerns with a volatile currency.”
He added: “There is a clear movement of money leaving South Africa because it is not seen as a safe place to invest.”
According to Jammine, the Reserve Bank will have no alternative but to hike rates aggressively to curb the inflationary impact of the rand.
He did not rule out the possibility of a hike as big as 50 basis points next month as inflation would be a bigger menace to the economy in the long run, and with devastating consequences for ordinary South Africans.
He said the rand had become a proxy for sentiment over Africa because China’s economic problems would curtail demand for raw material exports, depress local currencies further and create a negative loop for government finances.
All things being equal, the rand’s slide will be a boon for South African exports but the electricity shortage has left companies less prepared to invest.
* Additional reporting by Sechaba Nkosi, Bloomberg and Reuters
** Follow Ellis Mnyandu on Twitter: @Ellis_Mnyandu
BUSINESS REPORT