South African Rand Logs Fifth Weekly Drop as Stocks, Gold Slide

By Garth Theunissen

Oct. 25 (Bloomberg) -- South Africa's rand fell for a fifth week as stocks and commodities slumped and investors sold higher- yielding assets on concern the worldwide financial crisis will crimp economic growth.

The rand also dropped to a record against the Japanese yen as South Africa's benchmark equity index declined to the lowest level in more than two years. The currency weakened as a decline in gold, the country's biggest export, eroded earnings prospects for the biggest producer of precious metals.

``Negative speculative sentiment toward'' emerging markets ``is turning the rand into a one-way downward bet,'' said Ian Cruickshanks, head of research at Nedbank Treasury in Johannesburg. ``We're not masters of our own currency.''

The rand slumped 11 percent this week to 11.1480 per dollar by 7 p.m. in Johannesburg yesterday, extending its drop this year to almost 40 percent. Against the euro, the rand slid 5.8 percent in the week to 14.09. It fell 18 percent versus the yen.

Emerging-market currencies including the Hungarian forint, Ukraine's hryvnia and South Korea's won have slumped this week as investors cut holdings of higher-yielding assets in favor of safer holdings such as U.S. Treasuries. The MSCI World Index of stocks lost 7.7 percent, extending its decline this year to 45 percent, as credit-related losses and writedowns topped $660 billion in the worst financial crisis since the Great Depression.

Europe's Dow Jones Stoxx 600 Index slid 8.4 percent in the week while the FTSE/JSE Africa All Share Index lost 8.3 percent.

Risk-Taking Evaporating

``Risk-taking has evaporated, which is resulting in consistent currency weakness,'' said Roderick Ngotho, a currency strategist for Europe, the Middle East and Africa at UBS AG in London. ``Asset classes across the board are suffering.''

South Africa's currency has slumped 38 percent this year while the benchmark stock index has lost more than 30 percent after foreigners turned net sellers of almost 41 billion rand ($3.8 billion) of the nation's stocks and bonds. Africa's biggest economy relies on the inflows to finance the shortfall in its current account, a measure of trade in goods and services, which has exceeded 7 percent of gross domestic product for four consecutive quarters.

The deficit will reach 7.6 percent of GDP this year before swelling to 7.8 percent next year and 8.9 percent in 2010, Finance Minister Trevor Manuel said in his mid-term budget speech on Oct. 21. Manuel also slashed his economic growth forecast for next year to 3 percent from 4.2 percent.

``The focus is on external vulnerabilities, whether on the capital or current account,'' said Ngotho. ``Countries with the biggest external imbalances are suffering most.''

Gold, Platinum

Gold plunged 9.2 percent in the past five days, dropping to $682.41 an ounce yesterday, the lowest in more than a year. Platinum, South Africa's second-biggest export earner, fell 11.4 percent in the week to $773.75 an ounce.

``The commodity super-cycle has broken, which automatically translates into weaker export performance,'' said Cruickshanks. ``Commodities are still the backbone of this economy.''

South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to trade in tandem with the metals' prices.

Government bonds fell in the week, with the yield on the benchmark 13.5 percent security due September 2015 adding 56 basis points to 9.86 percent. The yield on the 13 percent note maturing in August 2010 climbed 118 basis points to 10.69 percent. Yields move inversely to bond prices.

``The severe currency weakness has made people adjust their interest rate expectations,'' said Mokgatla Madisha, a bond trader at Investec Asset Management in Cape Town, which oversees around $60 billion dollars in assets. ``The market is now pricing in the small possibility of an interest-rate hike early next year, whereas a couple weeks ago investors were looking for cuts as early as December.''

South Africa's main interest rate is 12 percent.

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