Rand Falls Versus Dollar as Manuel Flags Budget Deficit in 2009

By Garth Theunissen

Oct. 21 (Bloomberg) -- South Africa's rand fell after Finance Minister Trevor Manuel said the country will post a budget deficit next fiscal year as the global financial crisis reduces economic growth to its slowest pace in eight years.

The rand extended declines against the dollar and euro after Manuel said in his mid-term budget speech today the shortfall will reach 1.6 percent of gross domestic product in the year through March 2010, compared with a February estimate of a 0.6 percent surplus. The government also cut its economic growth forecast for next year to 3 percent from 4.2 percent.

``This is very bad news for the rand because South Africa will now be joining the ranks of the twin-deficit countries,'' said Ulrich Leuchtmann, an emerging-markets currency strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``A fiscal deficit is a very bad thing to introduce in a country that's been running a deficit on the current account for some time.''

The rand fell as much as 3.6 percent to 10.5564 per dollar and traded at 10.5050 by 4:01 p.m. in Johannesburg, from 10.1875 yesterday. It slipped versus 14 of the 16 most-active currencies monitored by Bloomberg, losing 1.8 percent to 13.8587 per euro, from 13.6178.

Markets are focusing on countries with ``fundamental risks'' and that ``raises the possibility of further rand depreciation,'' Leuchtmann said. The rand may fall to as low as 12 per dollar by year-end, he predicted.

Higher global borrowing costs, falling commodity prices and weaker demand for South Africa's exports, will cause the economy to slow and push the budget into deficit, Manuel told lawmakers in Cape Town.

Surplus Shrinks

This year's budget surplus will be 0.1 percent of GDP, less than the 0.8 percent predicted in February, he said.

``The storm has arrived, it is fiercer than anyone could have imagined and its course cannot be predicted,'' Manuel said.

South Africa's currency also fell after the government said the country's current-account deficit will swell to 7.6 percent of GDP this year, 7.8 percent in 2009 and 8.9 percent in 2010.

The rand slid 33 percent against the dollar this year, making it the worst-performing major currency in the world, partly on concern the country will struggle to finance the gap with foreign purchases of stocks and bonds.

Foreigners have been net sellers of about 40 billion rand ($3.8 billion) in South African stocks and bonds this year, data from its exchanges show.

The rand is under pressure from the global credit crisis and not from a ``speculative attack,'' Lesetja Kganyago, the Treasury's director general, said in an interview in Cape Town today. The shortfall on the current account makes the rand more ``vulnerable,'' he said.

Government bonds stayed lower, with the yield on the benchmark 13.5 percent security due September 2015 rising 11 basis points to 9.45 percent. The yield on the 13 percent note due August 2010 climbed 19 basis points to 9.77 percent. Yields move inversely to bond prices.

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