South African Rand Headed for Biggest Monthly Drop Since 1985

By Garth Theunissen

Oct. 31 (Bloomberg) -- South Africa's rand fell against the dollar, extending its biggest monthly decline in almost a quarter of a century, as investors sold emerging-market assets amid the world's worst financial crisis since the Great Depression.

The rand is poised to weaken the most this month since August 1985, when the government suspended debt payments, as concern the credit-market squeeze would tip the global economy into a recession curbed investment in countries from Korea to Turkey. South Africa's currency also slumped as gold, the nation's biggest export earner, headed for its biggest four-week loss in more than 25 years.

``The extreme sell-off we've seen in emerging markets isn't simply a case of irrational fear but a consequence of the re- pricing of credit and risk taking,'' said Shahin Vallee, an emerging-markets currency strategist in London at BNP Paribas SA, France's largest bank. ``The global credit crunch means there's less money circulating in the world, which makes investors more discriminating when it comes to where they put it.''

The rand fell 0.1 percent to 10.0214 per dollar by 1:34 p.m. in Johannesburg, extending its monthly decline to 21 percent. It was the worst performer of the 16 major currencies monitored by Bloomberg, falling the most in October versus the yen. The Australian and New Zealand dollars had their steepest losses this month versus the U.S. currency since the mid-1980s.

Emerging-market currencies including Hungary's forint, the Chilean Peso and Brazil's real have weakened this past month as investors cut holdings of higher-yielding assets in favor of safer holdings such as U.S. Treasuries. The rand was the second- worst performing emerging-market currency monitored by Bloomberg this past month after the Turkish lira.

`Striking Weakness'

``The weakness in the rand isn't really surprising but the extent of the weakness against its emerging-market peers is quite striking,'' said Vallee. ``It's come under a lot of selling pressure.''

BNP Paribas is advising clients to keep ``buying dollars and selling rand,'' for at least the next week, Vallee said.

The currency of Africa's biggest economy slid versus the dollar and yen this month as interest-rate reductions in Asia, Europe and the U.S. were unable to prevent a global equities sell-off that erased more than $10 trillion of market value.

Stocks slipped in Europe and Asia today, extending the MSCI World Index's worst monthly slump on record. South Africa's FTSE/JSE Africa All Share Index fell for a fifth month, losing 14 percent, its biggest four-week drop since 1998.

Capital Outflows

Foreigners turned net sellers of almost 67 billion rand of South African stocks and bonds this year, data from its exchanges show. It relies on the inflows to finance its current-account deficit which is expected to reach 7.6 percent of gross domestic product this year, Finance Minister Trevor Manuel said Oct. 21.

``South Africa has a gaping current-account hole, which is a severe fundamental imbalance in the economy,'' said Bhanu Baweja, an emerging-markets currency strategist at UBS AG in London. ``It needs large flows of capital to finance its deficit and that's not going to happen when the world wants to hold capital rather than invest it.''

UBS recommends clients continue ``hedging for downside risk'' in the rand against the dollar, euro and yen. ``I think the rand will weaken further,'' said Baweja.

The rand also weakened this month as commodity prices fell, eroding prospects for earnings from exports. Commodities make up about half of South Africa's income from abroad, data from the Department of Minerals and Energy show.

Gold slid almost 17 percent this month, its biggest plunge since February 1983. Platinum, which rivals gold as the country's biggest export, fell 21 percent, its fourth monthly loss.

South Africa 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.

`Panic Selling'

Government bonds fell in October, with the yield on the 13.5 percent security due September 2015 adding 32 basis points to 9.17 percent. Yields move inversely to bond prices.

The rand slumped more than 28 percent in August 1985 after the then apartheid government declared a ``debt standstill,'' signaling its inability to repay foreign lenders. ``Panic selling'' of the rand forced the central bank to close its foreign-exchange market, according to the nation's treasury.

``It was an absolute disaster for the rand,'' according to Ian Cruickshanks, head of research at Nedbank Treasury in Johannesburg. ``Those were really dark times.''

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