The South Africa’s Reserve Bank (SARB) says it may intervene in the currency exchange market should the rand’s performance worsen, having slipped to its lowest rate against the US dollar on Monday.
This appeared to have a positive effect on the rand on Tuesday, which lost as much as 8.5% against the dollar on Monday, leading to an all-time low of 14.0682 against the greenback.
“In the event of developments that threaten the orderly functioning of markets or that may have financial stability implications, the SARB may consider becoming involved in foreign exchange markets to ensure orderly market conditions,” the SARB said in a statement late on Monday.
The rand improved marginally against the buck on Tuesday morning, to 13.1800, Reuters reported.
Emerging markets are the worst affected in the current global mood, said analysts at Overberg Asset Management on Monday.
The company’s analysts’ Brett Birkenstock and Kirk Swart provided five reasons for the rand’s weakness:
1. Negative sentiment towards emerging markets
Global investors have taken a risk off approach with devastating effects for emerging market currencies and stocks alike. The ZAR and JSE have not been excluded.
2. Run to safe haven assets
A return to bonds, gold and hard currencies such as the US dollar and British pound has seen investors dropping risky assets. The ZAR is paying the price for being considered a non-safe haven.
3. China slowdown
China has been the world’s largest consumer of raw materials and commodities in their drive to grow their economy. They have managed to grow their economy in excess of 7% the last few years with the help of accommodating policies. The slowdown in the Chinese economy has led them to devalue their currency in an attempt to stimulate their export sector. This has led to other nations following suit by devaluing theirs in an attempt not to fall behind.
4. South African exposure to commodities
Although the financial sector is the biggest contributor to the South African economy, South Africa is still a country that relies heavily on commodity exports. With commodity prices falling due to the slowdown in China, all currencies that are exposed to commodities are being sold off.
5. Internal problems
South Africa is a country that is struggling to solve its own internal problems which is contributing to further rand weakness. Although the sentiment surrounding emerging markets is negative, South Africa is not helping its own sentiment by not solving its internal issues. Electricity shortages, a struggling manufacturing sector, as well as the latest visa regulations debacle have to be addressed if the long-term decline of the rand is to be turned around.
Reporting with News24