Rand Slumps as Worst GDP Contraction Since 2009 Deepens Gloom

(Bloomberg) -- The rand declined along with bank stocks as South Africa’s worst quarterly economic performance since a 2009 recession prompted traders to increase bets on a central-bank rate cut as soon as next month.

The deepest power cuts since 2008 weighed on manufacturing, mining and agriculture, curbing gross domestic product by an annualized 3.2% in the first quarter, double the median estimate for a contraction of 1.6%. Weak factory data in the current quarter raises the risk that the economy may slip into the second recession in successive years.

“The combination of weak mining and factory activity is weighing on GDP growth, but probably also the uncertainty both in domestic policy and globally with the trade war is having an impact,” said Jakob Christensen, a Copenhagen-based economist at Danske Bank A/S. “Today’s number raises pressure on the SARB to lower interest rates.”

Read more about South Africa’s GDP data

• The currency slumped as much as 2% and was 1.9% weaker at 14.7412 per dollar by 3:08 p.m. in Johannesburg
• Yields on benchmark 2026 bonds climbed two basis points, reversing a drop of as much as four points
• An index of banks dropped as much as 4.1%, while the country’s benchmark stock gauge gained 0.5%, supported by shares of companies that benefit from declines in the rand.

The data highlight the task facing President Cyril Ramaphosa’s new administration in boosting investor confidence in the economy as its confronts a yawning fiscal deficit and escalating debt that are putting South Africa’s final investment-grade credit rating at Moody’s Investors Service at risk.

“Disappointing GDP growth figures are a very timely reminder of challenges President Ramaphosa and his ANC face to put the struggling economy on the path of sustainable and well balanced growth,” said Piotr Matys, a London-based strategist at Rabobank. “Perhaps this much deeper contraction will be a strong incentive for the Ramaphosa administration to accelerate the pace of economic reforms.”

With the global economy heading for a significant slowdown and markets discounting policy easing around the globe, traders are betting the South African Reserve Bank will have no option but to cut its policy rate at its next meeting. Forward-rate agreements are pricing in 25 basis points of easing in July, and another 15 by year-end.

Two of five Monetary Policy Committee members voted for a rate cut at the last meeting on May 23, when the central bank left its policy rate unchanged at 6.75%. With inflation well within the 3% to 6% target range and growth flagging, the pendulum may swing to easing in July, according to Citigroup Inc. economist Gina Schoeman.

While it may help to resurrect growth, lower rates would add pressure on the rand at a time when South Africa needs to attract portfolio flows into its stocks and bonds to finance its current-account gap, projected to have widened to 3.3% of GDP in the first quarter.

What Bloomberg’s Economists Say

South Africa’s economy stumbled badly in the first quarter as power outages hit the mining and manufacturing sectors. Bloomberg Economics also sees the country as the most vulnerable to the escalating trade war between the U.S. and China, which we expect to weigh on its exports and investment in 2H. As a result of the 1Q data, we will be cutting our forecast for 2019 growth to less than 1%.

Mark Bohlund, economist

--With assistance from John Viljoen.

To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, Gordon Bell

©2019 Bloomberg L.P.