‘Rand weakness not a bad thing’

Ankara — A further fall in the rand is not necessarily a bad thing and the currency should be allowed to play its role as a shock absorber, South African Reserve Bank governor Lesetja Kganyago said this weekend.

Kganyago also told Reuters in an interview at the Group of 20 finance chiefs meeting that, to the extent rand depreciation was part of a global foreign exchange rebalancing, it need not be a worry.

“Our assessment of the South African economy is that the risk to the economic outlook is on the downside. It doesn’t follow that the depreciation of the rand is a bad thing for South Africa, if anything, it should spare the export sector” and (importers),” he said.

The rand hit a record low to the dollar last month, as rising concerns about waning growth in China hit commodity-linked currencies, prompting Sarb to say it may intervene to try to quell volatility.

Currencies are a major topic at the G20 meeting in Ankara, as emerging markets such as South Africa and Turkey have been battered this year as a the dollar has surged on expectations the United States will hike rates.

Separately, South African Finance Minister Nhlanhla Nene told Reuters markets have priced in a US interest rate hike and are unlikely to see big spillovers from policy normalisation in the world’s largest economy.

“The communication and the cooperation that we’ve been having from the US has actually helped,” he said. “That is why I don’t think it’s … an issue that might have huge, unexpected spillovers.”

Nonetheless, economists expect the weaker rand is likely to fuel inflation, putting pressure on Sarb to raise domestic rates further despite an economy struggling to grow in the face of South Africa’s worst power crisis in seven years.

Kganyago said he expected that electricity constraints will begin to be alleviated somewhat towards the end of 2016 and beginning of 2017.

Meanwhile, South African equities have marched ahead this year despite sluggish economic growth, with local investors scaling back their bond exposure in favour of shares that offer a hedge against a sharply weaker currency.

Central bank regulations limiting local investors to taking only 25 percent of their assets offshore have prevented a mad rush out of South Africa that might have ensued with the rand’s nearly 20 percent fall against the dollar this year.

But asset managers are now juggling their money around more actively than they have done in the past to maximise returns, and the local bourse has benefited the most. “It’s been a good news story for the equity market and a bad news story for the bonds,” said Mike Keenan, a strategist at Barclays Africa.

“It’s a way of protecting your investment against rand depreciation, and that has actually seen the JSE doing very well in an environment where growth is still weak and the central bank is hiking rates.

The rush to equities has boosted the likes of Naspers, Sasol, Richemont, which have a big weighting on the share index and generate most of their revenue from abroad, meaning a weaker rand works in their favour.— Fin24.