Rand rally masks slump

QUESTIONS: WHY IS LOCAL CURRENCY STRONG AND ECONOMY WEAK?

- Ciaran Ryan

The ZAR traded at R16.51 to the USD last week, capping off a 13% rally against the greenback over the past year.

In the same week, the Absa Purchasing Managers' Index (PMI) shows a manufacturing sector in deep trouble, with the index declining by 1.5 points to 40.5 in December - its lowest level since the Covid shock in 2020. An index below 50 signals a contraction in economic activity. Above 50, the economy is expanding.

There's a clear disconnected between the ZAR-USD exchange rate and weak economic fundamentals at home. Lower inventories and a decline in the employment index were the main reasons for the PMI drop.

There seems little evidence that lower interest rates and declining inflation are showing up on the factory floor.

Minerals exports reported an exceptional year, primarily from rocketing precious metals prices. Elsewhere, it was a different story.