Apprehensive rand teeters on back foot after IMF warning
Economy / 27 November 2019, 11:30am / Banele Ginindza
JOHANNESBURG - A jittery rand rattled the R15/$ cage yesterday after a warning by the International Monetary Fund (IMF) team and as emerging markets took strain from a stronger dollar.
The rand went to a low of R14.8537 at 10.38am yesterday, as markets digested the IMF’s report, which was released on Monday. By 5pm it was trading at R14.81.
The visit, a three-week follow-up from one in May, highlighted the major challenges facing the country, which include prolonged weak economic growth marked by rising unemployment, inequality and greater credit-rating risk if the government did not act fast to implement reform, a deteriorating fiscal situation and difficulties in the operations of state-owned enterprise.
“The IMF recommends that South Africa creates an environment conducive for private sector investment and take a decisive approach to implement structural reforms in order to boost economic growth,” said a statement from the Treasury. It said interventions undertaken since the IMF May visit included the approval of the Integrated Resources Plan, simplified visa regime and the scrapping of a requirement for unabridged birth certificate for children entering the country. The cumbersome regulation was widely blamed for low tourist numbers to the country.
In October, the Treasury downgraded its growth forecast to just 0.5percent for this year, down from the 1.5percent projection made in February, as the economy battles high unemployment and a rising public service wage bill.
However, Investec economist Annabel Bishop, in the third quarter Business Cycle report yesterday noted that gross domestic product (GDP) growth for the third quarter was now at risk of coming out closer to 0percent quarter-on-quarter, seasonally adjusted annualised (qqsaa) than the 1.9percent qqsaa previously forecast.
This she attributed to a number of sectors seeing disappointing numbers including industrial production while real retail sales returned 0percent qqsaa in the period.
“Next year, GDP growth will likely be closer to 1percent year-on-year (y/y) than 1.5percent y/y, as structural reforms lag. The IMF warned last night that it projects South Africa’s “economic growth to remain sluggish in 2020 - below population growth for the sixth consecutive year. With low growth and low job creation, the increasing labour force is projected to exacerbate unemployment pressures, poverty, and inequality.”
Bishop said that while the “IMF’s recommendations are not new, the creepingly slow pace reform is occurring in South Africa, if at all, in a number of areas such as relieving the regulatory burden, is continuing to damage confidence”.
Reuters reported that currencies in the developing world traded slightly lower yesterday as the dollar strengthened on encouraging signals in US-China trade relations.
China’s Commerce Ministry said top trade negotiators from both sides participated in a phone call yesterday, and discussed “core issues of concern”.
“Investors are just waiting for more details before increasing their exposure to riskier assets, and definitely the dollar in this situation is benefiting,” said Piotr Matys, an emerging markets FX strategist at Rabobank.
“It’s a bit of, why take the risk and trade in EM assets when you can just continue buying the dollar.”
Matys said the IMF warning was “nothing new”, but was just a reminder that there were some serious issues and tremendous challenges South Africa faced to try and put the economy on a sustainable path.