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Manuel: SA markets a poor indicator for economy

Current market movements are not rational and the rand’s value does not reflect the inherent strength or weakness of the South African economy, Finance Minister Trevor Manuel said on Wednesday.

He also criticised credit rating agencies for not taking South Africa’s specific conditions into account when cutting its rating outlook to negative, as part of a wider review of major emerging markets earlier this week.

”With what we are witnessing across markets at the moment, there isn’t a lot of rationality,” he told Reuters in an interview on the sidelines of a meeting to discuss the financial crisis hosted by the African Development Bank.

”There is a very aggressive closing out of positions that is not informed by rationality or empirical studies. Part of what you see on the exchange rate appears to manifest the same kind of trends,” he said.

South Africa’s rand has weakened sharply this year — and in particular since the acceleration of risk aversion over the past six weeks — with the currency tumbling about 35% against the dollar in 2008.

It slipped almost 2% on Wednesday to 10,52, a two-week low but still well off the near-seven-year trough of 11,88 touched last month.

Most emerging markets have been hit as global equities fall, but a large current-account deficit, at 7,3% of GDP for 2007, makes the rand more vulnerable to a drop in capital inflows.

”The problem referred to earlier is that in an environment where people are taking short-term punts, there is too much oscillation on exchange rates,” Manuel said.

”It is a different kind of issue because what I am saying is you are not seeing a reflection of inherent strengths and weaknesses of the economy.”

South Africa’s National Treasury says economic fundamentals are sound and the country was largely cushioned from the global crisis, given its well-capitalised banking sector.

The economy should slow in 2008 and 2009 but growth will outpace rates in developed markets, where many are facing recession.

The government has forecast growth of 3,7% this year and 3% next year, down from the average 5% expansion of the past four years.

Manuel said credit rating agency Fitch’s decision to lump a group of emerging markets together in the ratings revision presented problems for policy makers.

”Anything to be considered within the norms of macroeconomic management is seen as a huge risk by these rating agencies, and that presents us with a very particular problem as the constancy of detailed evaluation appears to be lacking, and it places countries like ours in very serious jeopardy,” he said.

The rating agency said on Monday South Africa’s large current-account deficit, largely funded by portfolio flows, meant the risk of a ”hard landing” and even recession had increased, given an expected fall in capital flows to emerging markets.

Standard & Poors also cut its outlook for South Africa to negative, partly on worries the weak currency would delay rate cuts, leading to slower growth. — Reuters

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Tom Pfeiffer
Tom Pfeiffer works from London, England. A Bloomberg editor. Views expressed are mine, not those of my employer. Retweets are not necessarily an endorsement Tom Pfeiffer has over 122 followers on Twitter.

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