South Africa: Local Markets Likely to Be in
Thrall of Global Trends

Mariam Isa
Johannesburg

VOLATILITY is likely to remain the name of the game this week, with local markets held hostage to shifting global trends in the absence of local economic data.

Trade in the rand is set to stay choppy after the unit dived to a five-year low at R8,36 to the dollar last week, before political events and a shift in global sentiment spurred a dramatic rebound.

News of a deal in Zimbabwe, and the dismissal of corruption charges against African National Congress (ANC) president Jacob Zuma, helped the rand to claw back some of its losses, traders said.

But it was mainly a change in the global backdrop -- fuelled by speculation that troubled US investment bank Lehman Brothers will find a buyer -- which propelled the unit 2,4% firmer to R8 to the dollar in a few hours.

"It's absolutely insane," said Alvise Marino, an emerging-markets economist at IDEAglobal in New York.

"Due to high volatility we can't discount the odds of wild swings in the rand."

He thinks that the unit may rebound to R7,74 to the dollar this week provided that renewed global risk appetite, and a rebound in commodity prices, stay in place.

But like many other analysts, he thinks that in the longer term, the rand will not sustain a break below R8 to the dollar and is likely to drift back towards R8,35 or R8,50 later this year.

"The long-term prospects for the rand are not looking good ... commodity prices are down, mining output is down and the combination of the two will affect external accounts," he said.

Marino was referring to the gaping deficit on SA's current account, its broadest measure of trade in goods and services.

The shortfall narrowed to 7,3% of gross domestic product in the second quarter of this year from a 26-year peak at 8,9% in the first quarter.

But the improved trend may not hold, after news of a sharp widening of the trade deficit to R14,3bn in July -- the second-biggest shortfall on record.

Weaker prices for SA's key mineral exports, platinum and gold, coupled with lower mining output, will squeeze export revenues. At the same time demand for imports is supported by a huge official infrastructure spending drive. If global risk aversion dominates over the next few months, foreign buying of SA's assets will dry up, halting the capital inflows needed to finance its current account gap.

That might lead to a sharp depreciation in the rand, which would fan inflation.

But the unit's see-saw swings late last week show it would be wrong to assume it is a one-way bet. "For now I think the market is very unsure and focusing on movements in equities and the dollar," said Nedbank trader Dave Gracey.

"If equities weaken again the rand will follow."

When asked to provide a year-end forecast for the unit, he replied: "If you held a gun to my head, I would say between R7,90 and R8,40 (to the dollar)."

Politics is another wild card. News that Zuma will not have to face prosecution means he will become the country's president.

That removes uncertainty about SA's leadership, and the threat of violent protests by Zuma supporters. But it also brings concern over the direction of economic policy.

Despite many reassurances from Zuma and other ANC officials, investors still fear that the influence of his left-wing allies will lead to less prudent fiscal policies.

"Uncertainty about who will be president is receding and that is positive," said Standard Chartered research head for Africa, Razia Khan.

"But the new leadership of the ANC must do a better job of getting their message across, to reinforce whatever plans they have by reassuring investors."

The extent to which SA could depart from business-friendly policies would be limited by the discipline of markets, which was recognised by the ANC, she said. But investors should also recognise that the more buy-in the government had from grassroots, the more beneficial it would be for SA in terms of political risk.

The judge who threw out the graft allegations against Zuma last week did so on the grounds that there had been political interference in the case -- which pointed a finger at President Thabo Mbeki, she said.

If there is pressure for him to step down before his term expires, it would have to be handled carefully to avoid a knee-jerk negative market reaction.

Source: http://allafrica.com

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