S.African rand recovers slightly but stays vulnerable

The South African rand pared losses on Friday after officials said the country had not approved any arms shipment to Russia late last year, but the currency remained vulnerable to a fresh selloff after a turbulent week on domestic markets.

The South African rand pared losses on Friday after officials said the country had not approved any arms shipment to Russia late last year, but the currency remained vulnerable to a fresh selloff after a turbulent week on domestic markets. The currency has been pummelled this week by investor concerns over the worst power cuts on record, and a U.S. allegation that a Russian ship had picked up weapons in South Africa in December.

The rand recovered from its weakest level ever of 19.5100 to the dollar hit earlier in the day. It was trading at 19.3350 at 1500 GMT, down 0.74%, after South African officials hit back at the accusations. It had slumped 2.4% on Thursday. However, analysts said the allegations were concerning.

"The risk of SA being seen to, or actually, collaborating with Russia should not be underestimated," said Investec Chief Economist Annabel Bishop in a research note. There could be further substantial rand weakness if South Africa is proven to have helped Russia, which will heighten inflation amid already worsening power cuts, she said.

JP Morgan predicted on Friday that the South African economy would contract this year by 0.2% due to rolling blackouts. MORE INTEREST RATE HIKES

The weaker rand was also adding to concerns about high inflation which could keep the South African central bank hiking interest rates longer than expected. "The rand has come under pressure which, at the margin, makes it more likely that the Reserve Bank will hike interest rates further than we expect," Jason Tuvey, deputy chief emerging market economist at Capital Economics said in a note.

This could be another challenge for investors and households alike already grappling with high inflation and cost of servicing debt. The Johannesburg stock market was firmer on Friday after slumping the day before.

The blue-chip index of top 40 companies was trading up 1.57% and the all-share index was up by 1.47%. They are down roughly 2.5% from all-time highs seen at the of January. The benchmark 2030 government bond was slightly weaker, with the yield up 6 basis points at 10.940%. (Additional reporting by Promit Mukherjee Editing by Nick Macfie, Kirsten Donovan and Emelia Sithole-Matarise)