South Africa's rand sank this week to within sight of three-year lows against the dollar as a wave of strikes spread beyond the mining sector, threatening the biggest industrial crisis since the end of apartheid.
After two months of violent labor unrest in the platinum and gold mines, Japanese car giant Toyota said on Thursday its Durban plant had fallen victim to the wildcat strikes that are shaking Africa's biggest economy only three months before an ANC leadership election.
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President Jacob Zuma is favorite to win re-election as head of the ruling party, although a widening of the strikes and sell-offs of the rand and domestic bonds threaten to expose his lack of economic expertise.
So far, a wave of foreign flows into the bond market related to South Africa's October 1 inclusion in the influential Citi World Government Bond Index (WGBI) on October 1 have helped underpinned domestic asset prices.
But signs are emerging that the WGBI effect is waning, and concerns about the strikes' impact on growth is rising.
The rand has lost nearly 1.3 percent this week, recording its fourth daily loss in five days on Wednesday as strikes, a yawning current account gap and a Moody's ratings downgrade took their toll.
"These events have had a marked impact on the currency, not-withstanding the evidence of substantial purchases of South African bonds by foreign investors on the back of the WGBI inclusion," said Bruce Donald, a strategist at Standard Bank
"The strikes are certainly one of the factors impacting investor sentiment towards South Africa in terms of the political uncertainty it might create. It also has negative consequences for growth and for the current account through its impact on mining exports."
In July, before the wave of strikes started with a wildcat walkout at Lonmin's Marikana platinum mine, exports of minerals, precious stones and metals accounted for half of all South Africa's trade receipts.
Moody's last week cut South Africa's sovereign credit rating to Baa1 from A3 amid a souring of investor sentiment over the protests that have hit production in the world's top platinum producer and No. 4 gold producer.
All that has put pressure on Zuma's government, which was criticized for its handling of the unrest at Marikana, where more than 40 people were killed in August, the majority shot dead by police.
This week, Reserve Bank Governor Gill Marcus noted the rand remained vulnerable to "changing risk perceptions in global financial markets and domestic issues, such as the tragic events at Marikana".
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The rand has been lifted by about 84 billion rand ($10 billion) of portfolio flows since the start of 2012 as foreign accounts that track the WGBI stocked up on local debt ahead of the October 1 inclusion, Marcus said.
But the governor cautioned these levels were not sustainable.
Despite its recent strong run, the rand is still among the weakest performers against the dollar so far this year in a basket of 20 emerging market currencies, shedding more than four percent since January.
By contrast, units such as the Hungarian forint, Polish zloty and Turkish lira have rallied 9 percent, 8 percent and 4 percent respectively.
The rand hit 8.4524 earlier on Thursday, within sight of Wednesday's month low of 8.4590. A sustained hold below the 8.45 area could push it to 8.55/dollar, then all the way towards the three-year low of 8.71 it hit in early June amid intense concerns about Europe's debt crisis.
Waning WGBI flows make the currency more vulnerable to swings in global risk appetite as investors eye the unabating credit crunch in the single currency area.
"We expect the WGBI flows could start to ease up now after the actual inclusion date and perhaps thin out over the next week or two and then normality could kick back into effect," said Sean McCalgan, a market analyst at ETM.
"That leaves the rand in a rather vulnerable position," he added. "WGBI is one of the only positive drivers working in favor of the rand at the moment."
For a graphic on the rand: http://link.reuters.com/dab23t
($1 = 8.4415 South African rand)
(Editing by Ed Cropley and Patrick Graham. Graphic by Vincent Flasseur)