South Africa's Rand has been under pressure for months. After seesawing with other emerging market currencies over the summer as the Europe went through hell, USD/ZAR has been testing the 9.00 handle since October. In recent days, this pair appears to have gained a foothold over this key figure, closing in New York today at 9.1998 per greenback. Further Rand selling in Asia, despite broad USD sogginess, pushed the Rand down another 400 points as of 3:17 AM GMT.
South Africa faces tremendous economic challenges, and no political will to confront them. The ruling African National Congress, which has won every election since the end of apartheid with over 60 percent margins, continues to essentially govern as a single party dictatorship. The results have been widespread corruption, unaccountable leaders, and mediocre governance. To thrive, South Africa needs to become a functioning multi-party democracy. Alas, to date, oppositions groups are too fractured and disparate to ever challenge the ANC's choke hold on power.
On the numbers side, the fundamentals remain dismal. The current account deficit remains dangerously high at close to seven percent of GDP, despite considerable commodities for export. Government finances are a wreck as well, with a budget shortfall of 4.2 percent of GDP. Total public debt is manageable at the moment coming in at 41.2 percent of GDP. However, the falling Rand has prevented South Africa from taking advantage of ultra low interest rates in advanced economies by issuing bonds denominated in foreign currencies. Instead South Africa is forced to borrow on the expensive local market; debt service reached nearly 3 percent of GDP this year, almost three quarters of the annual budget deficit.
Tradewise, South African exports remain weak due to lack of demand in its main export market, Europe. Finally, labor unrest plagues the mining industry, as miners frustrated by low pay and an accountable government have walked off the job. Demonstrations have turned deadly as miners have clashed with both police and members of rival trade unions. This major disruption in a key export sector further weakens South Africa's vicarious balance of payments position. In sum, South Africa looks to be poorly positioned to take advantage of an increased demand for commodities during the global recovery.
In a recent report, the Wall Street Journal noted that some investors believe that these realities had already been priced in, and that the Rand can't fall much further. The Economist's Big Mac index, and other more sophisticated measures of purchasing power parity also show the Rand as been significantly undervalued. However, the significant downside risks continue to weigh on the Rand, and in an environment of weak sentiment, South Africa really needs to show tangible progress on addressing government incompetence and corruption, reaching equitable resolutions to labor disputes, and shoring up government finances. Admittedly ,the last can wait until external factors improve. Nobody should begrudge the RSA for running a budget deficit in the face of weak international demand for its exports. But allowing the former two to fester for nearly twenty after the end of apartheid is inexcusable. Income distribution was actually slightly more equitable under white rule than it is today.
The Wall Street Street Journal and Big Mac index be damned. The Rand is still a strong sell.
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