In this my first financial article of many to come I would like to just touch on the subject of the rand and its apparent volatility as seen by many especially in recent times. I will try not delving into too much detail in terms of statistics and numbers; I am sure all that is readily available even on this website for our more numbers-orientated readers.

The first thing that springs into mind is the most obvious factor that is impacting on everyone at the moment whether personally or those close to you. That is the credit crisis. If you had not heard about that as yet, you should remove those blinkers, as it has hit home recently here in South African when the official statistics showed that SA is in its first recession in 17 years.

The credit crisis has stemmed in it a crucial ingredient called fear! People all over the world have been pulling their money from economies and institutions that they perceive to be risky following the spate of bank failures in the US linked to the subprime crisis in that country that spread like a wild fire to other European nations. Unfortunately for us, this means being in the third world country this has indirectly impacted on us also. Investors, in such trying times will move their money from risky assets and economies, and put them into perceived safe ones. What are the safe options these investors would consider?

Well treasury instruments especially the US bills and cash would be the first point of shelter in terms of protecting your capital. Therefore SA loses out on the foreign direct investments as money is taken out of the economy by investors dumping Rand shares and instruments for US treasury bills and US Dollar denominated cash deposits. With such a massive outflow one can only imagine the depreciating impact it has on the Rand.

The Rand can be seen to be a somewhat floating currency dependant to a certain degree on the free market forces making the currency even more susceptible to fluctuations especially when significant global events occur. The other risk here is the exposure to currency speculators who have many ways of gaining from a volatile currency in the same manner equity investors gain from volatile stocks. Although there are some limitations to speculative activities due to some of the exchange controls that are in place in SA, unscrupulous dealers can always find a way to circumvent these (such as use of derivative instruments).

The potential for political unrest or uncertainty definitely is something that foreign investors keep an eye on. Lets face it, a lot of investors were sceptical of Jacob Zuma’s corruption case outcome and as well as the outcome of the elections. Fear of uncertainty or drastic changes, may cause foreign investors to pull their money out of the SA economy and with it causing the depreciation of the Rand. A good example is when someone who is influential such as Trevor Manuel resigned last year, albeit for a day or two, the markets and the Rand had a mini-crash upon hearing such news. This is not just a local event, as the same would have happened when the influential and long-term serving FED’s Alan Greenspan retirement was announced in the US.

Inflation statistics actually affect the Rand as well because of purchasing power parity theorem, which shows that higher than expected inflation would cause a devaluation of a currency. This “Triple P” occurs in order to eliminate the problem of arbitrage. SA inflation has been problematic especially due to prices of food and wages which have proven to be sticky downwards. The problem with inflation is that as prices increase in rand terms, they may not be increasing at the same rate as in US dollar terms. Therefore this is what results in one currency, the rand, depreciating faster than the other (the US dollar). If this market correction did not happen, then arbitrage opportunities would exist and would be exploited until the problem has corrected itself, i.e. the Rand has depreciated.

The rand quite recently has been strengthening and this is mainly attributable to the improving global sentiments. Investors are becoming more confident that the steps taken by the US and European countries to stem the global financial rot is working. This bodes well for us in third world countries since confident investors, means more risk appetite and these investors start to move their capital back into SA stocks and other third world economies, causing currencies such as the Rand to strengthen. The general trend seen at present is the US stocks recovering now and this feeds into the SA markets and the Rand. It also helps that the South African big four banks have survived well through these trying times without any need for bailouts. This once again sends positive signals to the foreign investors that South Africa does not have the same financial rot as the western countries, and brings in confidence for investments propping up the Rand.

However, trying to guess what the Rand does next is something that I doubt anyone can do precisely. The best approach in my view is considering the factors that mainly affect this currency and trying to forecast how these factors will play out in the future to reach a conclusion where the Rand will be in the upcoming months or years. But the only problem is that some of these factors are unpredictable, therefore your guess is as good as mine! Have a good day.

Maki

South Africa’s new president, Jacob Zuma announced his new cabinet yesterday (Sunday) and there were a few surprises. One big question was if Trevor Manuel would remain as the minister of finance but it was not meant to be. Zuma has decided to go with Pravin Gordhan as the new minister of finance in South Africa. Gordhan headed the South African Revenue Service (SARS), SA’s tax authority. Under his leadership, SARS received great admiration for steadily raising income.

Gordhan’s appointment signals the end of Trevor Manuel’s 13 year reign as the minister of finance, making him the world’s longest-serving finance minister. Under Manuel, the South African economy did well as investors approved of the tight monetary and fiscal policies he kept in place.

But Manuel will not be totally out of the picture, he will still remain part of the South Africa government. Manuel will take up a role to head a powerful new planning body in the South Africa government. It will be interesting to see how the markets and investors react to the appointment of Gordhan now that their ‘darling’ Manuel is no longer in the top finance position. There should not be much reaction as Gordhan is expected to do well in his new position. And with Manuel still being part of the picture, we do not expect much changes in the economic policies.

Some good news going into the long weekend. The South African Reserve Bank’s monetary policy committee (MPC) has cut the key repo rate by 100 basis points. This brings the rate down to 8.5%, with the prime lending rate dropping to 12% from 13%, with effect from May 4. The repo rate is the rate at which the central bank lends to other banks, while the prime lending rate is the benchmark rate at which banks lend to customers. Since December 2008, interest rates have come down by a total of 350 basis points.

Data released today (29 April 2009) shows that South Africa’s targeted consumer inflation slowed slightly to 8.5% year-on-year in March from 8.6% in February. Analysts had predicted the rate to come down as low as 8.4% but they were not too far off. It is expected that the consumer price index (CPI) should come down to the central banks target of between thee and six percent by October this year. Headline CPI inflation stood at 1.3% on a monthly basis in March compared to 1.2% in February.

All eyes will now be on the central bank tomorrow when they make a decision on interest rates. Most are expecting interest rates to go down by 100 basis points tomorrow but we could only see a 50 basis point drop.

The delicate state of the global economy could be rocked by an outbreak of swine flu, which has killed over 100 people in Mexico and infected many others in the United States, Canada, Spain and New Zealand. 

Underscoring the serious nature of an outbreak is a study conducted by the World Bank in 2008, which estimated a major swine flu pandemic could cost $3 trillion and cause worldwide gross domestic product (GDP) to plummet almost 5%.

"A nasty chill will run through the market…as people think back to the SARS virus," Justin Urquhart Stewart, investment director at Seven Investment Management, told Reuters.

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The elections are over now in South Africa and the ANC won the elections by sweeping 65.9% of the votes. The fact that the ANC did not get the two thirds majority vote need to be able to change the constitution is seen by financial analysts as a good thing. The ANC themselves may not be too concerned about not winning a majority vote as they probably have no intentions of changing the constitution but investors may see this as a good thing. Investors tend not to be keen on one-party states.

Many analysts are expecting the economy to remain the same even if Jacob Zuma is the president of the country. It is very unlikely he will make drastic changes to economic policy. The first thing Zuma may want to do is to make sure that Trevor Manuel and Tito Mboweni remain in their respective positions of minister of finance and reserve bank governor. These two have in many peoples eyes been behind the relative success of the South Africa economy.

What is critical though is that we as South Africans should not think we are immune to the global economic crisis. I have heard many people thinking that what is happening in the USA and Europe will not happen in South Africa. I beg to differ. We could possibly head the same direction as those countries currently struggling, if economic policies are not kept in check and thus the importance of good governance.

A lot of eyes are going to be focusing on the ANC in the upcoming months to see how they deliver. More so now that there is a larger opposition presence in National Assembly committees as well as a significant DA and COPE presence in the National Council of Provinces. The ANC failed to win the Western Cape vote which went to the DA. It will be interesting to see how the ANC handles the Western Cape as it is one the most richest and important provinces in South Africa economy.

Now that we know the ANC has won the elections and Jacob Zuma will be the next president of South Africa, everyone is waiting to see if current minister of finance, Trevor Manuel will remain as the minister of finance in the Zuma lead government. It would be really unwise for Zuma to get rid of Manuel who many people, including the important foreign investors, have faith in. There was a time, not too long ago, when some had thought that Manuel was going to step up after Thabo Mbeki was recalled, and that sent the markets into a frenzy as they feared that a departure by Manuel could cause chaos in the South Africa economy.

On Monday (27 April 2007), a senior official in the ANC said Trevor Manuel will continue to have a cabinet-level role in government thus quashing away the specualation that Manuel may be given another role which is not that of a minister. ANC treasurer-general Mathews Phosa, a former lawyer and ally of new South African President Jacob Zuma, said the final decision on Manuel’s future would be made in the next two weeks. I guess we just have to wait until then to find out exactly what is going to happen to Trevor Manuel.