Rand Falls to 6 1/2 Year Low Versus Dollar on Recession Concern

By Garth Theunissen

Oct. 22 (Bloomberg) -- South Africa's rand fell to a 6 1/2 year low against the dollar after stocks slumped around the world on concern a global economic slowdown will hurt corporate profits, cutting demand for higher yielding, emerging market assets.

The rand traded below 11 per dollar for the first time since April 2002 as South African stocks snapped a three-day advance, tracking a slump in Asian and European equities. South Africa's currency also dropped after Finance Minister Trevor Manuel said yesterday the country will post a budget deficit next fiscal year to ease slowing economic growth, while the shortfall on the current-account would swell to 7.6 percent of GDP.

``The main driving force behind the rand's current stress is the real worry about the state of the global financial system and its impact on the world economy,'' said Shahin Vallee, an emerging-market currency strategist in London at BNP Paribas SA, France's largest bank. ``South Africa needs massive amounts of portfolio inflows to fund its current account deficit which aren't going to be forthcoming in an environment of risk aversion.''

The rand fell as much as 4 percent to 11.0798 per dollar, the lowest level since April 22, 2002. It traded at 11.0295 by 12:51 p.m. in Johannesburg, from 10.6520 late yesterday. It weakened versus all 16 most-actively traded currencies monitored by Bloomberg, slipping 1.8 percent against the euro to 14.1638.

Financial Crisis

Benchmark stock indexes have suffered their biggest declines since 1987 as credit-related losses and writedowns topped $660 billion in the worst financial crisis since the Great Depression.

The MSCI World Index lost 2.5 percent, extending its decline this year to 40 percent as concern deepened government bailouts to save the global banking system won't avert a global recession. Growth in the world's industrialized economy will slow to 0.5 percent next year, from 1.5 percent this year, the slowest pace since 1982, the International Monetary Fund said Oct. 8.

Europe's Dow Jones Stoxx 600 Index declined 3.1 percent while the MSCI Asia Pacific Index decreased 5.2 percent. South Africa's FTSE/JSE Africa All Share Index dropped as much as 3.9 percent, extending its decline this year to 29 percent.

``There's a massive unbundling of risk occurring all over the world after four weeks of market horror,'' said Brigid Taylor, a senior currency dealer at Rand Merchant Bank in Johannesburg. ``Investors are getting out of riskier emerging market assets and countries with deficits on their current accounts are getting hit the hardest.''

South Africa's currency has fallen almost 38 percent against the dollar this year, making it the worst-performing major currency in the world as foreign investors turned net sellers of almost 41 billion rand ($3.8 billion) of the country's stocks and bonds.

Deficit

Africa's biggest economy will post a fiscal deficit of 1.6 percent of gross domestic product in the year through March 2010, compared with a February estimate of a 0.6 percent surplus, Manuel said in his mid-term budget speech in Cape Town yesterday. The government also cut its economic growth forecast for next year to 3 percent from 4.2 percent. The shortfall on the current account will reach 7.8 percent next year and 8.9 percent in 2010.

``Manuel's speech certainly didn't help the rand,'' said Vallee. ``Increased public sector spending combined with the current account deficit just adds another layer of risk to the rand at a time when global growth is slowing.''

Gold fell 1.9 percent to $756.67 an ounce while platinum slipped 4 percent to $857 an ounce, eroding earnings prospects for South Africa, the world's biggest producer of precious metals. The country produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to move in tandem with the metals' prices.

Ruble, Won

Other emerging market currencies including Russia's ruble and the Korean won also fell today after Argentina's planned seizure of pension funds stoked concern the nation faces its second default this decade. Hungary's central bank raised its benchmark interest rate by 3 percentage points in an emergency move to protect the forint from further depreciation.

South African government bonds fell, with the yield on the benchmark 13.5 percent security due September 2015 adding 34 basis points to 9.78 percent. The yield on the 13 percent note maturing in August 2010 climbed 38 basis points to 10.13 percent. Yields move inversely to bond prices.

``It's largely the rand that's driving the fallout in the bond market,'' said Andre Roux, head of fixed interest at Investec Asset Management in Cape Town, which oversees about $60 billion in assets. ``The weakness in the rand means interest rates are going to stay higher for longer.''

The South African Reserve Bank's main interest rate is at a five-year high of 12 percent or 1,150 basis points above Japan's and 950 basis points higher than Switzerland's.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net.