Factories ‘ecstatic’ as euro crisis hits rand
Business Day - May 24th 2012, 10:11
The rand fell on Wednesday to its lowest against the dollar in almost six months, and the JSE remained on the back foot as concern over the fate of the euro zone rattled global markets.
The rand dropped to R8,44/$ in late afternoon trade, reaching its lowest level against the greenback since the end of November.
The fall was welcomed as a boost to South Africa’s flagging factory sector. Earlier this month, Trade and Industry Minister Rob Davies said he backed industry’s call for intervention to weaken the rand.
Exporters have for years complained about the strength of the local currency, which they say has compromised export industry’s competitiveness. Over the past year, however, the rand has lost more than 21% to the dollar.
"We are ecstatic with the rand’s performance. If it stays there, South Africa will start creating more jobs," Stewart Jennings, CEO of PG Group and chairman of the Manufacturing Circle, said. At $8,50/$, the rand would not be inflationary, he said, arguing the inflation rate had been driven up by higher administered prices of fuel, power and levies.
However, analysts say the rand faces volatility in the months ahead, as the euro crisis unfolds.
Kevin Lings, Stanlib’s chief economist, said there was a 60% chance that Greece would stay in the euro zone.
"It’s in everybody’s interest … if Greece doesn’t stay in, the market will start to focus on who’s next, leading to a risk of contagion."
Election results in Greece and France this month have pointed to an electorate frustrated by the spending cuts meant to rein in deficits, which has led to high unemployment and low growth for the euro region.
Jacques-Pascal Porta, fund manager at Ofi Gestion Privee in Paris, said on Wednesday: "In Europe we have the big challenge of this debt crisis and it has become difficult to forecast the outcome. It’s become a political problem, which is difficult to forecast."
The US has joined European leaders calling for growth policies and an end to the focus on austerity championed by Germany for the past two years. This week, former Greek prime minister Lucas Papademos said the risk remained that Greece might exit the euro.
Mr Lings, however, cautioned against taking a one-way bet either way for the rand because of Greece’s second election in as many months, due on June 17.
"Markets will worsen and improve as we get various statements from European politicians either for or against Greece’s continued involvement in the region. We are going to have this pattern of risk aversion and no aversion until these elections."
The JSE all-share index has shed more than 4,6% from a record high earlier this month, and on Tuesday closed at its lowest since January 11. Commodities, including gold, have reversed early season gains and continued their slump on Wednesday. Platinum prices were positive, and traded 1,6% firmer by late afternoon.