Rand bottoms out

Rand bottoms out

The rand hit a fresh five-year low of R11,25 to the US dollar during trade on Monday morning, 27th January 2014.

Eyewitness News reported that this came ahead of the interest rate announcement and amid an ongoing strike in the platinum sector and risk-averse sentiment in emerging markets, meaning investors are moving away from developing economies such as South Africa. According to The New Age, South Africa has been dubbed one of the "Fragile Five" emerging economies, which are struggling under a large current account deficit.

Economist Craig Parker predicted this during his attendance at the Cape Business News Networking Breakfast in December last year. Parker economist at Frost and Sullivan, was Cape Business News’s speaker at the event.

“At the moment South African government is sitting with a twin deficit.” Parker said. “We've got a large current account deficit and a large public deficit. So investment options are becoming more and more limited as time is going on.”

Economist Mike Schüssler says there is little optimism for the rand in the currency market. “At the moment, the weak rand benefits very few people. It benefits the JSE, it benefits a few exporters, but for the majority of us, it means higher prices for everyday things.”

Parker warned that South Africa needed to watch what was happening to other emerging economies. “We’re not immune to that – we’re actually in a more vulnerable position than many other emerging economies because of our current account deficit and therefore any effects might actually be multiplied on the South African economy.”

The rand and other emerging currencies such as India's rupee fell sharply in 2013 as investors began anticipating the scaling back of the US central bank's money-printing programme.

“Seeing that we had such a tough year in 2013,” Parker proposed, “a lot of investments and people with money are holding back. Unfortunately I think we’re going to see this moving into 2014 as well.”

The South African economy has more still to face as the U.S. Federal Reserve reduces the financial spur that has supported emerging markets for the last few years. According to Reuters, the Federal Reserve decided in December to reduce its asset buying by US$10bn to US$75bn a month. The minutes of that meeting, which are due out on Wednesday, could hint at the timing and pace of any further reductions.

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