Currency matters in South Africa

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News on South Africa

25 June 2008

With the World 2010 football championships fast approaching, demand for property for sale in South Africa is expected to go through the roof over the next few years. However, when buying a property investment in South Africa, it’s essential that you take the currency exchange rate into consideration, as a fluctuating currency will impact on the purchase price.

It’s for this reason that homesoverseas.co.uk has asked currency exchange specialist Alastair Constance of Mercury FX to offer you a Rand update.  

‘The Rand looks to be in for a bumpy ride in the coming months. At Mercury FX we are bearish and expect the rand to depreciate against the major currencies in the coming months. There are a number of reasons for this.  

1.    The worsening financial outlook globally.
2.    South Africa’s large current account deficit.
3.    A perception of instability in South Africa and the Southern African region amongst global investors.

The rand has already weakened by around 17% against a trade-weighted basket of currencies so far this year. Globally the picture is pretty bleak at the moment with the oil price hitting new highs on an almost weekly basis, inflation pinching consumers everywhere, food prices rocketing and uncertainty surrounding exactly how to deal with all these problems. When the economic outlook is negative emerging markets tend to suffer first as investors withdraw their money from these higher-risk areas and instead invest in safer instruments and economic areas. This has certainly been going on over the last while and despite what the Reserve Bank calls ‘hot money’ still investing in SA, the mood could change fast causing financial outflows and further rand depreciation.

Secondly, the South African Reserve Bank said in it’s June quarterly bulletin that the country’s current account deficit had widened to a 26-year high of 9% of GDP in the first quarter of 2008. The deficit on the current account widened to a record R194,6bn (around £123.8m) and this signals that the rand will  become more vulnerable to shifts in the mood of global investors. The rand was not as badly affected as would normally have been the case following such a data release but Reserve Bank Governor Tito Mboweni had hinted at the outcome the week before which forewarned the markets and took some of the sting out of the news. Nevertheless, the ballooning deficit leaves the rand in a precarious position.

There is also a perception in the markets at the moment that the political future of South Africa is uncertain. If Zuma becomes the next president of the country what will his economic polices be? There’s a lot of scaremongering going on with relation to what economic track a Zuma government would take. The majority of it is far-fetched to say the least but it illustrates how little clarity there exists about Zuma’s economic stance. Zimbabwe is another factor. The ongoing crisis, which shows no signs of abating, is economically destabilising the region, without going into the humanitarian side of things. To date at least Zuma has been more outspoken on Zimbabwe so let’s hope that something comes of it, even if it is too little too late.

These three factors will continue to weigh on the rand in the third and fourth quarters.  This is bad news for those in South Africa who will have to pay higher prices for goods as the rand devalues and import prices are driven up.  The only good to come from a weaker rand is that the cheaper it gets the more it entices international investors into SA.  That offers little solace however to those in SA.  As the currency devalues it offers those funding their investments in other currencies a discount on their investment, every time the rand drops that dream home in Clifton becomes that little bit cheaper for those abroad.  

Alastair Constance

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