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Gold/Mining/Energy : SOUTHERNERA (t.SUF) -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (6764)	1/16/2002 11:22:46 AM
From: PHILLIP FLOTOW	Respond to of 7235

S African Rate Increase No Lifeline For Floundering Rand By Nicholas Hastings Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The skids. That's where the rand is headed following the South African Reserve Bank's surprise decision to whack rates a whole percentage point higher on Tuesday. The rise may well have been justified by growing inflation expectations. However, by undermining growth prospects just as investors were getting nervous over neighboring Zimbabwe and with more jitters spreading over Argentina's ability to pull itself back from economic disaster, the move served to only set the rand reeling again. "A one percentage point increase in interest rates yesterday will do little to enhance economic prospects, and inflation concerns related to previous rand weakness are unlikely to fade," said Neil MacKinnon, chief currency strategist with Merrill Lynch in London. By late European trading Wednesday, the dollar was up at ZAR11.8425, well above the ZAR11.5000 it traded at shortly before the SARB called its emergency meeting on rates. So far, though, it still remains short of its ZAR13.85 traded low hit on Dec. 21 amid deepening concerns over Zimbabwe's controversial land reform policy. A steady erosion of the rand, which the SARB was no longer able to defend with reserves, has knocked it off a high, in May last year, of nearly ZAR7.75 to the dollar. Its 20% recovery from the pre-Christmas low was helped by drawdown on a $1.5 billion syndicated loan arranged by the government and the sale of a 20% stake in M-Cell, a government-held communications holding company, for $475 million. By then, however, the damage of a collapsing currency was already wrought. Inflation, as measured by the CPIX index, had risen to 6.3%, well above the 3%-6% target set for the SARB. And with forecasters looking for inflation to rise to as high as 8.5% before the end of the year, the SARB appears to have had little choice but to raise the repo rate to 10.5% form 9.5%. Adam Slater, senior emerging strategist at Credit Agricole Indosuez, said the move "reflects well on the SARB." But, "this is unlikely to be the end of the story" with more rate hikes likely to come before June. How well these play with the rand depends on the state of the economy. But they are unlikely to prove any more helpful than Tuesday's move if they create a political split between the government and SARB over the central bank's independence. In the meantime, the currency will still have to cope with the severe economic malaise. Arthur Kamp, South African economist with HSBC in Johannesburg, points out that the rand's recent weakness only highlight the shortcomings. "There is an urgent need for accelerated structural reform including further privatization and land reform," he said, noting that the government also needs more "focussed policies" for dealing with Aids, crime and land distribution. It is the last of these which has caused havoc in Zimbabwe. South Africa's failure to distance itself from the policies of Zimbabwean President Robert Mugabe has proved a prime factor undermining the rand. With Mugabe facing international strictures as he tries to turn his country into a one-party state, there is little sign that current volatility in the rand will end before he holds elections on March 9 and 10. To make matters worse for the rand, the continued political and economic crisis in Argentina, despite its decision to devalue the peso 10 days ago, has injected fresh concerns not only into neighboring Latin American currencies but into emerging markets in general. Rumors last Thursday that the Buenos Aires government had been toppled may have proved untrue but they only helped to underscore the underlying uncertainty that is rippling through the market and reducing investor appetite for currencies such as the rand. PHIL