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Rand back under R14 to the dollar – for now
Rand back under R14 to the dollar – for now

Rand back under R14 to the dollar – for now

ECONOMIC NEWS - Sep 7th 2016, 08:45

The rand has strengthened to under R14 to the dollar on the back of surprisingly positive GDP data for the second quarter – but economists warn that this isn’t necessarily a turning point in South Africa’s current decline to junk status. 

Stats SA on Tuesday reported that South Africa’s GDP growth from the second quarter of 2016 beat expectations by some margin, coming in at 3.3% growth, month on month, and 0.6% growth year on year.

This was due to a boost in production in all but two sectors (agriculture and electricity) with a strong recovery in mining (11.8%) leading the way. The country’s first quarter data showed a decline of 1.2%, setting up the worry that South Africa could slip into a technical recession.

The positive data’s effect on the rand was instant, with the currency firming 1.15% against the dollar to R14.21. It was also 1.0% firmer against both the euro and British pound, at R15.86 and R18.91 respectively.

As US markets came into play overnight, the rand strengthened even further, with early morning trade on Wednesday showing the rand at R13.95 to the dollar, R18.68 to the pound and R15.70 to the Euro.

This marks the currency’s strongest levels since news broke that finance minister Pravin Gordhan could be facing criminal charges from the Hawks.

Not build to last

Despite the much-needed positive news from the GDP data, economists have warned that it is not enough to avoid a downgrade to junk status in December of this year.

Other economic fundamentals, including high levels of unemployment and near-zero growth for the country, show a picture of overall decline, where enough has not been done to push the country onto a growth trend.

Consumer and business confidence is low; corporate profitability is stunted, and even the recovering sectors have little prospect for long-term sustainability, economists said.

This is further exacerbated by political infighting and uncertainty around Gordhan, which is one of the key factors rating agencies pointed out in June and July 2016, when they granted South Africa a reprieve from the pressures of junk.

According to research analysts Nomura, junk status for the country is all but guaranteed at this stage – and current and future political turmoil (including the possible removal of Gordhan, and the signing off of costly state-funded projects) is likely to push the rand to R17 to the dollar, if not beyond.2016 Copyright, BusinessTech. All right reserved 

Read more about: rand | markets | economy | dollar | currencies

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