The rand lost further ground against the major currencies in trade on Monday, pushed by data showing that manufacturing activity posted its worst reading in 13 months on declining new sales orders.
Bloomberg reported that the purchasing managers’ index compiled by the Stellenbosch-based Bureau for Economic Research and Absa Bank, slumped to 43.4 in August from 51.5 in July. A reading below 50 indicates contraction in the factory sector.
“Business sentiment and the rand have wiped out all the gains that came on the back of President Cyril Ramaphosa’s ascent to the power since December. Manufacturing, which accounts for about 13% of gross domestic product, shrank in the first quarter, contributing to the economy’s biggest contraction in nine years. The industry lost 105,000 jobs in the three months through June,” Bloomberg said.
It further pointed out that investors will know whether South Africa has entered a technical recession on Tuesday, when GDP figures for the second quarter are published.
The economy shrank 2.2% quarter-on-quarter in the first three months of the year. London-based Capital Economics said there’s a “serious risk” output fell again between April and June. The rand was the worst-performing emerging-market currency after the lira and Argentine peso last month, and continued its downward trajectory on Monday.
- Dollar/Rand: R14.85 (1.11%)
- Pound/Rand: R19.08 (0.47%)
- Euro/Rand: R17.22 (0.82%)
The local unit has been under strain in August, touching R15 against the greenback several times before clawing back slight gains despite a cocktail of negative economic news, political risks and falling commodity prices, and initially sparked by crises in Turkey and Argentina and escalating trade tensions between the US and China.
Bloomberg reported that president Cyril Ramaphosa’s announcement on 1 August that the ruling party backed an amendment to the constitution to seize land without compensation has also weighed on the currency, along with worries over rules governing mining.
“Emerging-market vulnerabilities have not eased; in fact, they have intensified, which could imply that the rand is likely to remain on the back foot over the near-term,” Walter de Wet and Reezwana Sumad, analysts at Nedbank Group Ltd in Johannesburg, said in a report.
The currency could weaken above 15.00 per dollar if a land-reform Constitutional amendment has the effect of undermining property rights, Nedbank said. “Foreign investor sentiment remains a key risk.”
Mamello Matikinca, chief economist at FNB, told Fin24 that she expects the country to fend off a technical recession, adding however, that it will be a ‘close call’.
“Data suggests that the economy expanded by 0.5% quarter on quarter seasonally adjusted and annualised, but we caution that there is high, two-way forecast risk depending on whether there are any revisions to the first quarter data,” she said.
Stanlib chief economist, Kevin Lings agreed, saying that he expected the country to escape a technical recession.
However, he warned that even if growth is at 0.5%, “that’s simply not good enough growth to generate confidence and create jobs. When you break down the growth rate it seems to us that manufacturing has slipped into recession. It looks like the retail sector certainly key parts are in recession”.