By Garth Theunissen Feb. 16 (Bloomberg) -- Just as half a million people head to South Africa for the Fifa World Cup, which Bank of America- Merrill Lynch says will add $1.1 billion to the economy, traders are betting the rand will weaken more than any major currency. While the world’s most-watched sports tournament is helping the economy through a $115 billion building program, labor unions are demanding more stimulus measures through a lower exchange rate and cut in interest rates. Finance Minister Pravin Gordhan will comment on the central bank’s mandate of using borrowing costs to keep inflation between 3 and 6 percent in his annual budget speech tomorrow, the presidency said last week. “Something is brewing on the political front,” said Imran Ahmad, an emerging-markets strategist at Royal Bank of Scotland Group Plc in London. “South Africa’s economic problems are starting to bubble to the surface and that’s causing more social pressure on the government to deliver on its promises.” The cost of put options to sell the rand at a preset exchange rate is 5.25 percentage points higher than the price for equivalent one-year call options to buy the rand, the widest gap or so-called risk-reversal rate of any of the 16 major currencies tracked by Bloomberg. The rand will slide 4 percent by the end of the third quarter and 6 percent by year-end, according to futures contracts on the JSE Ltd. The rand has depreciated 4.3 percent this year to 7.7121 per dollar, as of yesterday’s close. Political Influence Last year, the rand was the second-best performer among major and emerging-market currencies after Brazil’s real, climbing 28 percent against the dollar. Investors bought the rand to get interest rates of 7 percent, or 6.75 percentage points above the U.S., which also helped to halve the inflation rate to 6.3 percent since August 2008. The stronger exchange rate and higher interest rates are contributing to the country’s economic slump, according to the Congress of South African Trade Unions, which has about 2 million members and helped bring President Jacob Zuma to power last year. The federation known by the acronym Cosatu will meet with the youth wing of the ruling African National Congress on Feb. 18 to discuss a joint strategy to influence government policy. Both groups want the government to take ownership of South Africa’s mines, the world’s biggest producers of platinum and the third-largest gold suppliers. Trade Minister Rob Davies told reporters in Cape Town yesterday it’s “no secret” that the country needs a more “competitive and stable currency.” ‘Sacrifice Inflation’ While Gordhan is likely to resist increasing the budget deficit beyond the current 7.6 percent of gross domestic product, the highest since records began in 1961, he may announce changes to the central bank’s inflation targeting mandate to allow it to cut borrowing costs, BNP Paribas SA said. “The government is ready to sacrifice its inflation objectives as well as currency strength to boost growth,” said Elisabeth Gruie, an emerging-market currency strategist in London at BNP Paribas, France’s biggest bank. “There’s a good chance they’ll broaden the mandate to take growth into account when taking decisions on rates.” While Africa’s biggest economy returned to growth in the third quarter with a 0.9 percent expansion, ending its first recession in 17 years, consumer spending has contracted for the past five quarters. Safety Concern South Africa’s jobless rate is the highest of 62 countries tracked by Bloomberg at 24.3 percent, fueling one of the world’s worst crime rates with a murder level six times higher than in the U.S. and 11 times the rate in Britain. Safety concerns have sparked criticism of Fifa for hosting the tournament in South Africa, with German soccer club Bayern Munich’s President Uli Hoeness saying last month it was one of the worst decisions the organization has made. “People are always negative on South Africa and especially the rand,” said Malcolm Charles, a Cape Town-based portfolio manager at Investec Asset Management which oversees about $65 billion in assets. “The same people who said South Africa wouldn’t get the stadiums built in time are now raising safety fears because they were proved wrong.” The rand is likely to hold onto last year’s gains for the remainder of 2010 as emerging-market currencies and economies outperform, ending the year between 7.60 and 7.80 per dollar, Charles said. BNP Paribas estimates the exchange rate will weaken 6 percent from current levels to 8.20 per dollar by the time the World Cup starts in June, before sliding a further 4 percent to 8.50 by year-end. Sell on Whistle The rand is “the most overvalued currency,” said Peter Attard Montalto, a London-based emerging-markets economist at Nomura. After the World Cup, the currency will plunge toward its “long-run fair value” of about 9 per dollar by year-end, he said. While the World Cup may add between 0.5 and 1 percent to South African GDP this year, the rand will still depreciate after the tournament ends on July 11, according to Nigel Rendell an emerging-market strategist at RBC Capital in London. “The day of the World Cup final is the day you want to sell the rand,” said Rendell. “That’s the day all the good news will have been priced in. There could be a steep slide after the final whistle has blown.” To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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