Rand dips below R13 vs the dollar – but economists warn that all is not well
The rand broke through the R13 to the dollar resistance level on Wednesday, following positive CPI data released by Stats SA.
The stats body announced that consumer inflation for April 2017 dropped significantly to 5.3%, from 6.1% in March.
The rand was also further boosted by political sentiment pointing to growing opposition towards president Jacob Zuma, with reports out on Tuesday night indicating that a possible discussion on removing him as president could take place at the ANC’s NEC meeting this weekend.
The party has rubbished the reports.
The rand dipped below R13 to the dollar to hit R12.98 by 10h30 on Wednesday.
The rand’s current strength comes as something of a conundrum to analysts and economists, who point to South Africa’s weak fundamentals as a major stumbling block to the economy.
The IMF’s recently raised South Africa’s growth prospects from 0.8% to 1.0% for 2017 on the back of positive production data – however the country’s growth narrative for the past decade has been one of slow decline.
According to Maarten Ackerman, advisory partner and chief economist at investment firm Citadel, the apparent boon from the IMF is negligible in the bigger picture of South Africa’s economic state – and in reality, is still a negative.
Even at 1% growth, Ackerman said, South Africa’s population growth outpaces economic growth by 0.8%, “which implies that we are getting poorer despite having positive economic growth”.
“South Africa has seen little growth these past few years, leading some to label it the ‘wait-and-see’ economy. While the world’s economy grew slightly more than 3% last year, South Africa clocked growth of just 0.3%, largely due to embedded structural issues weighing on potential growth,” Ackerman said.
“Indeed, in recent years South Africa’s growth has fallen further and further behind its global peers.”
Until 2011/2012, South Africa’s economic growth largely correlated with that of the rest of the world. Being an open economy it benefited from globalisation, Chinese industrialisation and the resulting commodities boom from 2000 to 2007.
Similarly, it couldn’t avoid the negative impact of the global financial crisis in 2008.
However, since 2011, South Africa has been on a steady downhill slide, reaching its lowest growth rate since 2009, where the country only saw growth of 0.3% in 2016.
The economic decline has been chalked up to a number of issues, from political and policy uncertainty, structural unemployment, labour force red tape, and inequality and infrastructure deficits.
These issues have pushed South Africa into sub-investment grade status with ratings agencies, and have shattered investor trust in the country. The potential for a recovery in foreign direct investment seems unlikely in the near future, Ackerman said.
“The current relative strength of the rand despite these issues is a reflection of a fickle global risk appetite which is currently in favour of emerging markets,” he said.
“Long term fundamentals will ultimately drive currency sentiment, and the fundamentals don’t support current currency rates. When sentiment changes, and it will – and it can happen quickly – this tailwind will disappear.”
This view has been repeated by several economists and analysts, with the clear message that, despite the rand’s apparent strength, all is not well in South Africa.
Read: Time is running out for the rand – and South Africa: Sygnia CEO
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