SA’s currency has fallen to an all-time low against the US dollar. It briefly hit a rate of 14 to the dollar amid concerns about the strength of the Chinese economy, prospects of rising interest rates in the United States and the country’s own weak economic growth prospects.
Economies that rely on the sale of commodities — such as South Africa’s — have been hit by the slowdown in growth in China, a major source of demand.
The problem was compounded when China unexpectedly devalued its currency earlier this month.
The rand is particularly vulnerable because it is one of the globe’s most highly traded emerging market currencies, South African economist Martyn Davies told the BBC.
He added that South Africa’s central bank will find it hard to defend the currency against a slide in value, instead the government needs to address some of the fundamental economic issues such as the problems in the power sector.
South Africa remains Zimbabwe’s leading trade partner with the country accounting for more than half of the trade bill.
Analysts say the local manufacturers of goods that are similar to those manufactured in South Africa will fail to compete leading to lower profits and possible further closures because of Zimbabwe’s generally high cost structures. If more SA-produced goods are sold then overall price levels will fall leading to more disinflation while companies that export into Zimbabwe will increase their volumes to hedge their rand cash-flow but at the same time crowding the local shelf space.
However, on the bright side, all businesses with a model that focuses on importing raw materials from South Africa stand to benefit from low cost of goods sold (COGS).
Several other African currencies have been under pressure in recent weeks over fears of a Chinese economic slowdown.
With oil currently hovering around $40 (£25) a barrel, there are concerns about the prospects for oil-based economies, especially Nigeria and Angola.
The relative strength of the US dollar has also had an effect on — among others — the Zambian kwacha and the Ugandan shilling, which have both hit record lows in the past week.
In reaction to the slump, shares on the Johannesburg Stock Exchange sank the most in more than five years on concern plunging global commodity prices will worsen the country’s economic outlook.
Yields on rand-denominated bonds due December 2026 jumped 11 basis points to 8,42 percent, the highest since June 17.
The 167-member FTSE/JSE Africa All Share Index declined as much as 3,8 percent, before paring its fall to trade 2,5 percent down at 47 808,35, its lowest since January 6. The gauge has dropped more than 13 percent since its April 24 peak, a so-called correction.
China’s surprise devaluation of the yuan on August 11 has roiled global markets and reinforced concern of a steep slowdown in the world’s second-largest economy.
The Bloomberg Commodity Index, which tracks 22 raw materials, slumped to its lowest level since 1999 on Monday. The rand also dropped to record lows against the euro and British pound.
“The mood is not great and people are very nervous,” Ion de Vleeschauwer, chief currency dealer at Bidvest Bank Ltd, said by phone from Johannesburg.
“I don’t foresee much activity. People are probably trying to re-adjust their views on where to cost things that they wanted to import from everywhere in the world because now these things are 5 percent to 6 percent more expensive than they were last week.”
US stocks tumbled in opening trade Monday, with the Dow plummeting more than 900 points as a global equity slump worsened following another big drop in Chinese stocks.
About three minutes into trade, the Dow Jones Industrial Average stood at 15 537,98, down 921,77 points (5,60 percent). The broad-based S&P 500 sank 91,65 (4,65 percent) to 1 879,24, while the tech-rich Nasdaq Composite Index fell 368,52 (7,83 percent) to 4 337,52. — Herald.