South Africa: South African rand plunges to lowest level in 13 years in June
June 17, 2015
In May, the South African rand (ZAR) lost ground against the U.S. dollar, thus continuing a trend that began in mid-2011. The currency closed the month at 12.17 ZAR per USD. The figure was 3.76% weaker than on the same day in the previous month and 16.8% weaker on an annual basis. The depreciation of the rand underlines the economic difficulties that the country faces amid electricity supply constraints and feeble government finances.
The South African rand continued to depreciate this month, and on 8 June it traded at 12.60 ZAR per USD, thus reaching the lowest level in 13 years. The figure represented a 5.51% depreciation over the same day of the previous month. Moreover, on annual terms, the currency was 19.3% weaker. The rand has been losing ground against the USD as positive economic data in the United States are putting pressure on the South African Central Bank to increase interest rates. The Central Bank has kept the repo rate unchanged at 5.75% since July of last year in an effort to help the economy against the background of weak economic growth and rising inflation risks. Regarding this issue, Gina Schoeman, South Africa Economist at Citi comments:
“While the lagged effect of the lower oil price should reduce the current account deficit in H115, the headwinds to exports means it is likely to widen back to 5.5% of GDP in H2 15. The ZAR thus remains under pressure and, together with higher electricity tariffs and rising food inflation, will be cause for a breach of the CPI 6% target ceiling through 2016. The key uncertainty in the monetary policy outlook is over whether the SARB decides to pre-empt the Fed or not. We believe the former is the most likely given rising inflation risk and that the economy may now face a further two 25bp hikes in H2 15.”
Author: Dirina Mançellari, Senior Economist