Rand Slumps Most Worldwide; Government Denies Currency ‘Freeze’

The rand tumbled the most of any major or emerging-market currency after the Sake24 financial news service reported the government planned to “freeze” the currency. The government denied any such plan.

The rand lost as much as 1.8 percent to 7.5482 per dollar, its weakest intraday level since Oct. 5 and the biggest slide among 26 emerging-market and 16 major currencies tracked by Bloomberg. It traded 0.9 percent weaker at 7.4798 by 1:18 p.m. in Johannesburg, from a close of 7.4125 yesterday.

People will use the report “as an excuse to take profit on the rand because of the long-standing concerns in the market that South Africa may move towards a more populist institutional setup,” said Bhanu Baweja, head of emerging-markets strategy at UBS AG in London. “We don’t think that a freeze in the rand will happen because moving to a pegged exchange rate, closed- economy regime is a cost South Africa won’t want to pay.”

Sake24 said Economic Development Minister Ebrahim Patel was preparing “radical” economic policy adjustments that include fixing the exchange rate to stabilize the currency in a report that didn’t cite anyone. South Africa’s Cabinet never discussed the option of fixing the exchange rate, government spokesman Themba Maseko told reporters in Cape Town today.

The report has “absolutely no basis,” Zubeida Jaffer, Patel’s spokeswoman, said in a telephone interview from Cape Town today. “I have spoken to the minister and as far as we’re concerned, it’s without any foundation. It’s a mischief-making exercise.”

Labor Unions

The rand has gained more than 25 percent versus the dollar this year, erasing most of its 28 percent slump in 2008, as signs of a global economic recovery encouraged investors to buy higher-yielding emerging-market assets. Concern the strength of the rand was stalling recovery from the country’s first recession in 17 years prompted Reserve Bank Governor Tito Mboweni to request that his staff boost dollar purchases to stem the rally, according to his statement on Oct. 1.

The Congress of South African Trade Unions, which supported President Jacob Zuma’s rise to power, said last month that the country’s exchange-rate policy should aim to boost exports rather than have a “narrow focus” on inflation. Cosatu, South Africa’s biggest union federation with more than 2 million members, has criticized Mboweni for not cutting rates fast enough to revive the economy.

“There’s a lot of political posturing in South Africa at the moment but we’re a long way away from posturing becoming policy,” said Jeff Gable, head of Barclays Plc-owned Absa Capital Research in Johannesburg. “I don’t think the Ministry of Economic Development would decide exchange-rate policy unilaterally.”

Brazilian Tax

In Brazil, the government has imposed a 2 percent tax on foreign purchases of fixed-income securities and stocks to dent the real’s 33 percent gain against the dollar this year.

It is “unlikely” that South Africa would consider imposing a tax on foreign portfolio flows as the nation’s reliance on the funding is much greater than its South American counterpart, according to Gable.

“South Africa needs to invest much more than we save so we need to encourage foreign investment into the economy,” said Gable. “The bulk of South Africa’s financing comes from portfolio flows so if it punishes those inflows it won’t be able to meet its economic-growth target.”

Foreign purchases of South African assets are needed to fund the deficit on the country’s current account, a measure of trade in goods and services, which narrowed to a five-year low of 3.2 percent of gross domestic product in the second quarter. Foreigners purchased a net 83 billion rand ($11.07 billion) of the South African assets this year, according to the JSE Ltd. which runs the country’s stock and bond exchanges.

Rate Decision

Africa’s biggest economy will probably contract by 2 percent this year, Finance Minister Pravin Gordhan said at a conference in Cape Town today.

Central bank policy makers are likely to keep South Africa’s benchmark interest rate unchanged at 7 percent today when Mboweni chairs his last monetary policy meeting before stepping down, according to 25 of 28 economists polled by Bloomberg. The rate compares with deposit returns of near zero in the U.S. and Japan, boosting so-called carry-trades in which investors borrow at low interest rates and invest in markets where returns are higher, taking the risk currency moves will erase their profit.

Mboweni is scheduled to announce the interest rate decision at 3 p.m. in Pretoria today.