For a 3rd day on a row, The Rand has seen decline. It is now at five-week low against USD. It is priced at 8.8685 per Dollar and it is the lowest since 9th October. On the other hand, South Africa’s yield on benchmark 10.5% bonds which is due by December, 2026 has climbed up by 4 basis points (0.04% percentage point). The bond yields are now at 7.71%, which is the highest since 31st October.
The main reason behind Rand’s bad performance is the investor concern over the current-account gap of the country. Many fears that the gap will increase further as reports are suggesting that the metal exports of South Africa has declined.
According to the Government Data published recently, the mining production of the country has slumped most in the month of September (This is the biggest decline in last five months). The labor unrest has been the major reason behind this slump and it is being feared as the biggest since apartheid. Because of the slump, around $1.4 billion worth profits that South Africa generates from exports have been cut. This is the biggest trade deficit for the country in the last 4 years. According to the representatives of Johnson Matthey Plc, a London based company; platinum production has reduced to an 11-year low. The mine closures and violent strikes have caused huge cut in the output resulting into such reduction in Platinum production.
George Glynos, the Johannesburg-based ETM Analyst, stated that it is now to be seen that how the South African Government can cope up with all these industrial unrests and still can sell the product to the foreigners after mining it. According to him, this recent development shows that the Government should try to attract certain kind of inflows for financing the trade deficits of the country. Otherwise, the chances of a further weak Rand will increase.
The current-account gap actually measures the trade in services and goods. This gap for South Africa has actually widened to 6.4% on the gross domestic product in 2012’s 2nd quarter. This is the biggest deficit ever that the country has faced in last 4 years.
Brigid Taylor, who is currently the head of institutional flow sales at Johannesburg based Nedbank Group Ltd. said that investors are concerned that the elective congress of African National Congress (The ruling party of South Africa) may make changes in the policy causing further harm to the country’s economy. For an instance, the youth wing of the party is already lobbying so that Government takes over mining assets of South Africa. Taylor added that the political issues are becoming a huge factor in the downtrend of Rand and probably, the major currency of South Africa will go down even further for the remainder of 2012.
The three month implied volatility of Rand against USD has risen by 12 basis points to 14.5%. Rising volatility denotes that option traders believe the currency will receive wider swings in the next few months. Incidentally, this volatility is highest among all the major currencies.
As a result of the slow economic expansion and reduced consumer confidence, the retail sales of South Africa have been less than expected for September. According to Statistics South Africa, a Pretoria based Research Company, the retail sales have risen by 4.3% in September, much less than that of 6.7% in August. The estimated retail sales growth for South Africa for September was 4.8%.