Kevin O’Grady

Economics Editor

THE rand took a pounding yesterday on concerns about slower economic growth and the effect this might have on SA’s ability to finance its large current account deficit, as government and the Reserve Bank warned that higher interest rates were in the pipeline.

The currency hit a new 10-week low of R7,44 to the dollar, from R7,31 on Wednesday, after the International Monetary Fund predicted slower economic growth this year and next, and Bank governor Tito Mboweni bemoaned the “unhealthy” state of the trade balance.

Rampant consumer demand is held responsible for the severe trade gap and has prompted two rate hikes since June. These, in turn, have lowered expectations for economic growth, making SA a less attractive investment destination.

Less foreign capital flowing into the country makes it harder to finance the current account deficit, which reached 6,4% of gross domestic product in the first quarter, increasing the risk of the rand weakening dramatically and further fuelling inflation.

Consumers have not yet begun to temper their spending and borrowing habits in reaction to the 50-basis-point rate hikes in June and August, further threatening the current account and the rand.

As a result, both Mboweni and Finance Minister Trevor Manuel sent a strong message yesterday that further rate hikes would be on the way.

Giving a lecture at the Wits Business School in Johannesburg, Manuel said Mboweni had been warning consumers to cut back for the past year as part of his policy to “signal rather than beat consumers into submission”. With its recent rate hikes, the Bank was “still in the signalling phase.… What they’re trying to do is get the message through,” he said.

“The latest numbers show the message isn’t getting through,” Manuel said, referring to recent data showing new vehicle sales and private-sector borrowing at near-record highs.

At a separate event in Johannesburg, Mboweni acknowledged that tighter monetary policy could take some time to have an effect on the market, but pointed out that recent data releases “have not contained much good news, and these developments underline the risks to the inflation outlook that we have been highlighting”.

“The only way to manage conspicuous consumption is by raising interest rates.”

George Glynos, MD of Econometrix Treasury Management, said higher inflation and interest rates could dampen SA’s growth rate, causing foreign investors to shun the bond and stock exchange markets. That could make it harder to finance the current account deficit, causing the rand to drop, he said.

The rand recovered slightly last night to R7,37 to the dollar, but Glynos said it could “test R7,53 ... over the next few days.” The currency last hit that level late in June.

In response to a question about Jacob Zuma’s presidential ambitions, Manuel said the markets were likely to be resilient regardless of who emerged as new leader of the African National Congress and SA.

However, they existed to “maximise the accumulation of wealth”. Unless there was a coup d’état in SA they would continue seeking opportunities to do so. With Bloomberg