South Africa's Rand Drops Versus Dollar on Recession Concern

By Garth Theunissen

Oct. 15 (Bloomberg) -- South Africa's rand snapped a two- day gain against the dollar and the euro amid speculation the $2 trillion pumped into the world's banks won't be enough to avert a global recession.

The rand slipped the most in a week versus the dollar as stocks in Asia and Europe fell for the first time in three days on concern weakening economic growth will curb demand for South Africa's commodities, hurting company earnings. Federal Reserve Bank of San Francisco President Janet Yellen said yesterday the U.S. may already be in a recession.

``In the context of a slowing domestic economy, a global recession will be a double whammy for South Africa,'' said Roderick Ngotho, a currency strategist in London for Europe, the Middle East and Africa at UBS AG, the world's second-biggest currency trader. ``South Africa's export prospects will be severely compromised by a slowing global economy and that's not constructive for currency strength.''

The rand weakened 2.4 percent to 93412 per dollar by 2:31 p.m. in Johannesburg, from 9.1190 yesterday. It slipped versus 15 of the 16 most-actively traded currencies monitored by Bloomberg, losing 1.5 percent to 12.6106 per euro.

The prospect of a global slump is hurting emerging-market currencies from Brazil to Indonesia irrespective of attempts by the biggest economies to end the credit crisis with an unprecedented bank bailout. The IMF's World Economic Outlook last week forecast that global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a recession under the fund's informal definition.

`Weaker Commodity Prices'


``The rand is reacting to the outside sentiment that a global recession may be hot on the heels of the crisis in financial markets,'' said Jim Bryson, head of foreign-exchange trading at Rand Merchant Bank in Johannesburg. ``A global recession would imply weaker commodity prices and that would imply lower export revenue for a commodity-backed economy like South Africa's.''

The currency will ``trade with sentiment, falling as low as 9.45 by the end of the week if stocks keep weakening, Bryson said. At the same time, a rally in equities would ``drive the rand all the way back to 9 to the dollar,'' he said.

South Africa's FTSE/JSE Africa All Share Index tumbled 4.9 percent, snapping a two-day advance, as stocks around the world fell. The MSCI World Index of equities lost 1.3 percent and Europe's benchmark Dow Jones Stoxx 600 Index slipped 3.8 percent

`Forecasting Recession'

Investors should ``hedge against further rand weakness versus the dollar, euro and yen,'' Ngotho said.

Economic growth in the U.S. and the 15-nation euro-region economy will slow to 0.3 percent next year, according to UBS. About 25 percent of South Africa's total exports go the euro region and about 12 percent to the U.S., according to data compiled by the Zurich-based bank.

``Our economists are forecasting a global recession that will be led by a slowdown in the U.S. and Europe,'' Ngotho said.

Government bonds were little changed, with the yield on the benchmark 13.5 percent security due September 2015 at 9.99 percent. Yields move inversely to bond prices.

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