South African Rand: GDP Turnaround Not Sustainable say Investec

South African Rand

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- Strong rebound in SA growth helps ZAR

- Investec warn SA economy remains in fragile state

- Govt. urged to deliver turaround in investor sentiment

The South African Rand is looking set to record its fifth consecutive daily advance against the Pound on Tuesday, amidst ongoing weakness in the British currency whilst some better-than-forecast GDP numbers are proving supportive for the Rand.

South African GDP grew at 0.9% year-on-year in the second quarter of 2019, ahead of analyst forecasts for growth of 0.8%. Annualised quarterly GDP read at 3.1%, ahead of analyst forecasts for growth of 2.4% with the reading reversing the previous quarter's shock 3.1% decline.

The numbers appear to have provided some independent lift to the Rand:

GBP/ZAR is quoted at 18.1936 at the time of writing, having been as high as 18.94 in late August as the trend for the exchange rate turns lower.

SA GDP and the Rand

The USD/ZAR is meanwhile quoted at 15.1216, and had been as high as 15.40 in late August, following a month of strong advances by the U.S. currency.

The improved economic growth readings are partly down to improved electricity supply levels out of Eskom of late while a strong rebound in mining activity provided much of the heavy lifting in the headline figures. 

Mining and quarrying industry activity climbed 14.4% on a quarter-on-quarter annualised basis, its strongest performance since 2016.

Concerning the outlook, Lara Hodes, an economist with Investec says the growth was "largely underpinned by statistical base factors and the stabilisation of electricity supply in Q2.19, rather than a sustainable turnaround in economic activity."

"While the stabilisation of electricity supply in Q2 2019 likely supported this improved performance, domestic demand conditions remain weak. This coupled with softening international trade flows, underpinned by persistent trade tensions continues to hinder manufacturing sector activity," says Hodes.

Hodes adds the South African economy remains in a fragile state, operating against a backdrop of subdued activity and persistently low business confidence, which continues to weigh heavily on future growth prospects.

Investec forecast GDP is unlikely to be higher than 0.7% for the year.

"Government finances have deteriorated to the point of risking the loss of SA’s Moody’s investment grade rating, which would further undermine economic growth," says Hodes. "In order to lift sentiment and drive private sector fixed investment spend, and therefore growth, government regulatory efficiency needs to improve substantially to aid the ease of doing business in SA, while the hastened implementation of key reforms is essential."

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