On Thursday, the rand collapsed, shedding more than 30 cents of its value against the dollar in a matter of minutes after the US ambassador charged that South Africa had supplied Russia with guns and ammunition.
According to Reuben Brigety, the US ambassador to South Africa, the ammunition and weaponry were put onto a Russian ship that berthed at the Simon’s Town naval facility in Cape Town in December of the previous year, according to Advert Africa.
In the wake of the news on Thursday afternoon, the rand fell to R19.32, which is not far from its previous record low, set in 2020. It also nearly set a record low when compared to the pound; on Thursday, it was last trading at more than R24.
By late afternoon, the rand had rebounded to about R19.15/$.
Fears were raised by the news that the US might punish South Africa economically, maybe by ending the duty-free export privileges it enjoys as a result of the African Growth and Opportunity Act (Agoa).
“For many, the fortunes of the rand are becoming more overtly entwined with the political prospects of the African National Congress,” Robert Hoodless, an analyst at InTouch Capital Markets, told Bloomberg earlier on Thursday. “President Cyril Ramaphosa seems nowhere to be seen. Perhaps this is because of yet another calamitous diplomatic decision over relations with Russia.”
The currency has already been under strain; earlier on Thursday, it broke through the R19/$ threshold amid a poisonous concoction of load shedding, a worsening economic crisis, and worries about interest rates.
“The rand is in a fragile state, with local factors, in particular load shedding, weighing on the local economy and currency. Rand weakness is expected to continue in the short term,” said Bianca Botes, director at Citadel Global.
Load shedding will slow economic growth this year by 2%, SA Reserve Bank governor Lesetja Kganyago warned in a lecture at the University of Johannesburg earlier this week. The Reserve Bank now expects the economy to grow by 0.2% this year and by an average of 1.0% over the next two years. “[This] is barely an expansion,” he said.
The economy has also suffered as a result of rash interest rate increases. The Reserve Bank has argued that this should assist to control inflation, but in order to safeguard the rand, South African interest rates must also remain competitive.
The rand has been supported by the fact that investors are accustomed to South Africa offering significantly higher interest rates than established markets like the US, which has made rand investments appealing and maintained the flow of foreign capital into local markets.
However, as a result of aggressive US rate hikes, the gap between local and US rates has now closed, making South African rates less alluring. This is made worse by the rising uncertainty surrounding the country’s economic prospects.
The rand has had one of the worst years among emerging market currencies, according to Kganyago.
“Idiosyncratic factors such as persistent load shedding and the recent greylisting of the country by the Financial Action Task Force have kept investors wary.”
Because imports like fuel will keep prices high, he cautioned that rand depreciation might make South Africa’s concerning inflation issue worse.
All of this has put the Reserve Bank in a difficult position because raising interest rates will hurt a struggling economy while simultaneously battling inflation and preserving the value of the rand.
When the economy is already functioning poorly, fighting inflation is even more difficult since tighter financial conditions have the impact of slowing down overall economic activity. But if allowed to continue, rising inflation will either gravely impair the economy’s potential for growth or increase the short-term costs of finally reducing inflation down to target, according to Kganyago, who may be hinting at another rate hike at the end of the month. A rise of more than 25 basis points has already been factored into the market’s price.
However, according to Momentum analyst Johann van Tonder, more rate increases won’t help the rand.
“The rand is experiencing many setbacks: S&P’s downgrade of the country’s credit rating outlook, greylisting, weak and low growth due to, among other things, load shedding, risk aversion towards emerging markets due to the war, and a strong dollar as well. Therefore, another 25- or 50-basis-point increase in the repo rate to counter the setbacks won’t help much as it won’t strengthen the rand significantly. In fact, it may weaken the rand (and be counterproductive in fighting inflation) as it may lead to negative growth and a recession.
“For the rand to stabilise, a clear implementation plan is needed to solve the electricity crisis and logistical problems, and evidence that it is being put into action, so that the economy can grow and create jobs,” Van Tonder added.
Johann Els, the head economist of Old Mutual, thinks the rand is currently undervalued. If US inflation slows down sufficiently for the Fed to definitively suspend rises, the rand, according to him, might recover back to below R17 by the end of the year. The dollar will decline as a result. More interest rate increases are anticipated in the euro zone, which might put additional pressure on the value of the US dollar.
Given the significant private sector drive for renewable energy, load shedding risk will be significantly lower over the medium term in the upcoming years. The rand has also been negatively impacted by political unpredictability, but Els added that once the national election of next year is finished, the currency could recover.
“A little bit more economic growth, a little bit more political stability and less load shedding should keep the rand stable in the medium term.”
At lunchtime on Thursday, the rand was trading at R20.77 to the euro and R23.91 to the pound.
