S.African rand gets no joy from weak euro

Despite the bad news pouring out of the eurozone, South Africa's rand has weakened against the euro as risk-averse investors shy away even from currencies not tainted by the debt crisis. The South African currency has known several big swings in the past but had been stable for several months. In September, it was trading around 9.70 rands to the euro but now is at more than 11. Against the dollar, it has fallen from less than seven to more than eight. Economists agree on the reason -- risk aversion. Foreign investors are repatriating their money because of the gloomy outlook. The Australian dollar and the Brazilian real have also taken knocks recently. South Africa's economy is performing reasonably well. The 3.1 percent growth expected this year would more than please a European minister. Inflation is under control at less than six percent and public debt stands at less than 35 percent of gross domestic product, well below the EU limit of 60 percent. "This drop in September and October, it's a sort of return to the historic norm, where as soon as the news gets a little bad, the rand tends to fall," said Citibank economist Jean-François Mercier. South Africa's currency has fared well over the last three years, with interest rates higher than in Europe or the United States, he said. "But when things go wrong in the United States or Europe, you're allowed to worry about the South African economy," which is very exposed to Western countries, he added. The rand is also at the mercy of the EU debt summit, Standard Bank forex specialist Michael Keenan wrote Wednesday before EU leaders went into talks. "If international sentiment is heartened by the summit outcome, the rand should benefit from risk appetite," he said. "However, we believe that the risk lies in a disappointing set of resolutions to the EU debt crisis, or even a lack of resolution. This could provide an ideal catalyst for participants to sell the rand." A weaker rand is not necessarily a bad thing. Many economists believe the currency has been overvalued for years, hurting exports, but helping keep a lid on import prices and so inflation. "The rand is overvalued. What can we do about it? That is a difficult question," Trade Minister Rob Davies asks repeatedly. Finance Minister Pravin Gordhan is more cautious. "We recognize also that the volatility of the rand remains a difficulty for many businesses in the tradable goods sectors," he told parliament on Tuesday. "The currency has traded in a range of 6.58 to 8.25 rands to the US dollar this year, with volatility clearly linked to global financial turmoil," he said. "The rand weakened by as much as 7.5 percent against the US dollar in one day during September, before strengthening by 5.4 percent on another. "Depreciation in the rand in recent months has brought some relief to manufacturers though it has also contributed to some upward pressure on prices." This situation has left the Reserve Bank wavering between lowering interest rates -- now at 5.5 percent -- and keeping a grip on inflation, which is nearing the government's target ceiling of six percent. Treasury director general Lungisa Fuzile has already ruled out using foreign reserves to intervene in the market, saying there is not enough money available to defend the currency.