South African Rand Declines in Week on Global Recession Concern

By Garth Theunissen

Nov. 8 (Bloomberg) -- South Africa's rand dropped against the dollar last week as the country's stocks declined with those around the world on concern the global economy is headed toward a recession.

The rand weakened versus all 16 major currencies monitored by Bloomberg as the country's benchmark equity index declined on concern slowing expansion in the U.S. and European economies will erode demand for higher-yielding emerging-market assets. South Africa's currency also fell after reports showed manufacturing contracted for a sixth month in October and house prices rose at the slowest pace in more than 15 years.

``Economic data is looking really bad right across the world,'' said Kay Walsh, an economist and currency researcher at Rand Merchant Bank in Johannesburg. ``Industrial economies are on the verge of recession which makes investors very nervous of putting their money in riskier emerging markets.''

The rand fell 3.1 percent this past week to 10.0825 per dollar in Johannesburg, from 9.7800 on Oct. 31. Against the euro it dropped 3.8 percent to 12.9202, from 12.4475.

Rand Merchant Bank predicts the currency will trade at 9.5 per dollar by year-end and ``steadily weaken'' to 10.5 by the end of 2009, Walsh said.

South Africa's benchmark FTSE/JSE Africa All Share Index of stocks retreated more than 4 percent this past week, tracking a 3.6 percent decline in the MSCI World Index.

Africa's biggest economy relies on purchases of its stocks and bonds to fund the current-account deficit, which will reach 7.6 percent of gross domestic product this year, Finance Minister Trevor Manuel said on Oct. 21. Economic growth will slow to 3.7 percent this year from 5.1 percent in 2007, he predicted.

`Liquidity Dried Up'

``Global liquidity has dried up, which means there's less money flowing around to fund our consumption habits,'' said Walsh. ``The rand needs to adjust lower to correct our current- account gap.''

The rand lost more than 30 percent this year as foreigners sold almost 69 billion rand ($7.1 billion) more than they bought of the country's assets, amid the world's worst financial-market crisis since the 1930s.

Fears of a global recession forced the Bank of England to cut the U.K.'s key rate 1.5 percentage points on Nov. 6 while the European Central Bank lowered its rate by a half-point. Denmark and Switzerland also reduced rates, after the International Monetary Fund predicted economic contractions in the U.S., Japan and euro region next year.

Korea's central bank trimmed interest rates to 4 percent yesterday, the lowest level since 2006.

House Prices

South Africa's currency also weakened after manufacturing, which makes up which makes up 16 percent of the economy contracted, according the Investec Purchasing Managers Index. The pace of house-price growth slowed to an annual 1.2 percent last month, the weakest since January 1993, Absa Group Ltd., the country's biggest mortgage lender said Nov. 6.

The nation's foreign-currency reserves declined 4.4 percent to $32.9 billion by the end of October, compared with September, the South African Reserve Bank said yesterday. Reserves were expected to decline 1.2 percent, according to the median estimate of five economists surveyed by Bloomberg.

Government bonds rose in the week, with the yield on the benchmark 13.5 percent security due September 2015 losing 48 basis points to 8.61 percent. The yield on the 13 percent note maturing in August 2010 dropped 57 basis points to 9.10 percent. Yields move inversely to bond prices.

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