Donna Block
The rand was slaughtered this week as local investors fled the markets amid fears that the political and economic chaos playing itself out in Zimbabwe will spread into South Africa.
The currency started to recover on Wednesday when President Thabo Mbeki, taking questions from MPs in Parliament, promised that the government would make sure that the law was enforced if South Africans followed the Zimbabwean example on land seizure.
On the same day the currency hit a historic low of R7,17 to the dollar, bringing its depreciation this year to 15%, before recovering to R6,97 on Thursday. Analysts say it could fall further before recovering to about R6,60 by the end of the year.
Minister of Finance Trevor Manuel this week sought to play down the Zimbabwe factor, blaming the rand’s decline on the rampant dollar, and pointing out the rand has held its own against other currencies.
The sell-off started last Thursday with Mbeki’s address to the nation about the Zimbabwe crisis. His reiteration of the government’s ”softly-softly” approach to Zimbabwe helped to push the currency below R7 for the first time. Some analysts have suggested the attack on the currency was led by local – as opposed to international – currency traders.
One capital market analyst said she believed the attack on the rand was largely the work of South African traders – who, she said were essentially behaving like scaremongering ”racist whites” – and that foreign players, particularly in the United States, remained bullish about South Africa.
John Clemmow, head of African research at Investec in London, says that what’s happening in South African markets is no reason to panic. ”Informed foreign investors have known about the troubles plaguing Zimbabwe for a long time and the problems which now face the country did not come as a complete surprise.”
However, there’s no doubt that as President Robert Mugabe continues to play the race card and uses the sensitive issue of land to maintain his grip on power in Zimbabwe, foreign capital is fleeing Southern Africa and investor confidence throughout the entire region has been undermined.
South Africa’s economy has the most to lose as investment retreats. Foreign direct investment (FDI) remains paltry – the latest figures released this week show that FDI was down 40% in the first quarter of this year compared with the same period last year. Such long-term investment could slow further because of the Zimbabwean crisis.
The weakening currency has led to an outflow of investment from South Africa’s financial markets and the rand is being used to show investors’ displeasure with the entire region.
Business confidence levels are at a low point, and tour operators in Durban have reported foreign tourists have cancelled some holidays in South Africa because of Zimbabwe – a further sign of weakening confidence.
According to Dawie Roodt, an economist at PLJ Financial, the decline of South Africa’s currency is not an economic issue but a political one. The markets have been waiting for the politicians to say something concrete regarding Zimbabwe, giving investors a reason to come back into South Africa.
Clemmow also noted that the volatility in stock markets, especially the Nasdaq, has made investors much less tolerant of risk – so money is moving out of the emerging markets and into the safe haven of US money markets. News reports coming out of Africa such as the violence in Sierra Leone and the talk of land seizures in Kenya are also adding to Africa’s risk profile, giving investors a reason to stay at home.
One Africa market watcher in New York said that the South African market is very attractive and poised for a recovery, but what investors are looking for are some good economic indicators, a level of stability in emerging markets and a tougher line among the South African leadership against what’s going on in Zimbabwe.
Investors are also jittery over the prospect of a flood of refugees from Zimbabwe if the crisis escalates. That could exacerbate South Africa’s 37% unemployment and soaring crime.
In the short term, traders expect there could be further declines in the South African bond market and the rand unless the crisis in Zimbabwe begins to abate. But there appears to be no sign of that.