Mail & Guardian reporter
South Africa’s financial markets took a drubbing this week as the rand fell to an all-time low and the Reserve Bank raised its key lending rate by more than two percentage points to 18%.
The rand dropped to R5,16 against the dollar on Monday after rumours in London and New York last Friday that the Reserve Bank planned to devalue the currency over the weekend.
Despite Reserve Bank denials about a devaluation, the currency remained under pressure throughout the week. On Thursday, it was wavering around R5,14.
At the start of the week the central bank took the drastic step of fixing the repo rate – a relatively new short-term interest rate – three points higher at 18%, in an attempt to make domestic investments more attractive. Reserve Bank governor Chris Stals has warned that the bank would fix the repo rate during periods of heightened market uncertainty.
Meanwhile, a meltdown in other emerging markets hit sentiment in Johannesburg. In Russia interest rates were tripled to 150% as officials warned that the West might have to help bail out the rouble.
The South African capital market felt the pressure throughout the week, while the Johannesburg Stock Exchange lost almost 5% of its value on Wednesday.
Chantal Friedman, an economist at stockbrokers Barnard Jacobs Mellet, says emerging markets in general have been hit by a “flight to quality”.
She says most capital markets in developing countries are benefiting from the flight – the exceptions being Pacific Rim countries, which are feeling the crisis in Asian markets.
Nevertheless, out of all emerging equity markets, only Ghana and Morocco were boasting better returns than the South African market in US dollar terms since the start of the year.
Some economists have warned that although South Africa’s economic fundamentals are sound, the attack on the rand could become a self-fulfilling prophecy.
But Friedman says this is unlikely to happen this time around, and the Reserve Bank could even increase repo rates again to “stop the rot. Short-term pressure on interest rates is likely to intensify.”
Friedman says there is now no chance of a cut in the prime rate this quarter. However, she says if the markets stabilise, there is still scope for a cut in the third or fourth quarters.
“We believe the Reserve Bank’s willingness to respond relatively quickly to pressure on the currency, combined with reasonably sound economic fundamentals, means the currency crisis is unlikely to continue for too long.”