High Expectations for President Zuma to Restore Faith in the South African Rand (ZAR)
The South African Rand has fallen to 0.0925 against the US Dollar today.
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However, the Rand could gain some stability as hopes are high that Jacob Zuma, South Africa’s President, will instil some confidence in the South African public and give investors encouragement when he delivers his keynote speech.
Zuma plans to cut the unemployment rate from 25-14% by 2020 by implementing new policies after his reappointment as President in May.
The Rand has been enduring a difficult period of instability of late, with recent Platinum mining strikes resulting in economic contraction of 0.6% in 2014’s first quarter, along with weak fundamentals and an extensive current account deficit.
Ian Cruickshanks, expert economist for the South African Institute for Race Relations, has cast some doubt over Zuma’s ability to restore hope to investors.
He commented: ‘It’s a bit difficult to see Mr Zuma having some rabbits up his sleeve. I’m not expecting any positive announcements that will encourage investment or restore business confidence or consumer confidence.’
The mining strike has continued for five months, causing the mining industry’s production output to shrivel by almost 25%.
The contraction in the first quarter was South Africa’s first negative quarter since the global economic crisis in 2009 where platinum production played a large part in the recession.
The Rand suffered a severe softening after 70,000 workers refused to work unless conditions changed, and with power shortages and power plants failing, the threat of recession is on the table.
The Rand has fallen by 2.5% against the Dollar in 2014, this is in continuum from a 19% plummet against the ‘Greenback’ in 2013.
Last week South African Reserve Bank Governor Gill Marcus advised that the Rand was to be subject to a hard a recovery, stressing: ‘the domestic economy is facing enormous headwinds, many of which are of our own making.’
Marcus’ statement didn’t reassure investors, and this week has seen credit rating agencies Fitch and Standard and Poor’s downgrade South Africa’s outlook from stable to negative and take its credit rating to -BBB.
This is the second downgrade of the nation’s credit rating in less than 24 months by Standard and Poor’s.
The unfavourable credit rating results caused a knock on effect for the Rand as it fell by 1%.
The Rand will be affected by the results of domestic inflation and retail sales reports, to be released on Wednesday, with economists forecasting improved YoY and MoM figures.
Despite the possible resolution of the current miners’ strike there is still the risk of further strike action as South Africa enters ‘strike season’.
Strike season will allow strong unions to begin discussions with employers for an increase in wages. After such an intermission in the mining industry, the Rand will take time to recover itself as it will take weeks for companies to return to regular working capacity.