Rand on the ropes again as reality of permanent rolling blackouts sets in
The rand is on the ropes again, breaching the R18/$ mark on Monday for the first time this year and hitting its lowest levels since early November. Prominent domestic factors include the sinking reality of permanent rolling blackouts.
The rand has been here before and will be here again. Basically, it doesn’t have much going for it at the moment.
On Monday, the currency – which is prone to volatile swings – breached the R18/$ mark and hit its lowest levels against the greenback since early November. It has been weakening in fits and starts since the end of last year.
It has also been losing ground against other currencies, “moving closer to R22/£ and R19.50/€, experiencing substantial risk-off against the key crosses, losing ground on both global and SA specific issues”, Annabel Bishop, chief economist at Investec, said in a note on Monday.
Bishop noted several political risks which were taking a shine off the currency, as well as “deteriorating fundamentals”.
“The recent increased appetite of the ANC for coalitions with SA’s far left-wing political party (the EFF) at the municipal level has negatively affected investor sentiment, as has the country’s energy crisis, with load shedding permanent for the foreseeable future,” Bishop said.
The permanent state of rolling blackouts has become a common theme with economists and is why they are busy slashing their forecasts for South African economic growth this year.
The South African Reserve Bank (Sarb) sees growth of only 0.3% in 2023, almost exclusively because of the power crisis, which it estimates deducts as much as two percentage points from growth. Accountancy PwC estimates it may be taking as much as five percentage points off.
Read more in Daily Maverick: “PwC estimates rolling blackouts knocked up to five percentage points off SA’s 2022 GDP growth”
“For 2023 as a whole, the impact of power cuts on activity levels, business confidence and private investment cuts our GDP forecast by 0.9 percentage points to 0.7%,” Absa economist Peter Worthington said in a recent research note.
None of this is supportive of the rand. President Cyril Ramaphosa’s Sona last week did nothing to dispel the reality of the power crisis and the currency has been softening since, but this is also an extension of a trend that has been in place for weeks.
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Moody’s added to the gloom, with an issuer comment on Friday that said rolling blackouts’ impact “on businesses, consumer sentiment and investment will weaken the country’s already subdued economic growth prospects and threaten social and political stability”.
“The realisation that load shedding will be at this scale has been setting in,” Jee-A van der Linde, senior economist at Oxford Economics Africa, told Business Maverick.
“The growth story in South Africa has deteriorated meaningfully over the past few months and we are seeing that in the rand’s performance. It has been deteriorating since the start of this year, while the wider emerging market story has been more positive with China’s reopening.”
Van der Linde also said that according to the rand’s “long-run equilibrium” or “long-run value” – a technical reading derived from charts – the rand was about 10% undervalued currently, which could suggest a rebound is on the cards.
Known for its turbulence, the rand has bounced back many times before, but not in the dimming light of perpetual power cuts.
There are other factors at play as well, including a globally firmer dollar ahead of US inflation data on Tuesday that will suggest the path of interest rates in US and worldwide.
Economic and political malaise
But the rand is really a victim of the current domestic economic and political malaise, with Eskom’s woes just the worst of a range of factors that also include Transnet going off the rails.
This has a number of troubling consequences. The flames of import inflation are being fanned at a time when domestic food and fuel prices had shown signs of peaking.
This will not be lost on the Sarb when its Monetary Policy Committee (MPC) next meets in March. The MPC in January hiked rates for the eighth consecutive time, but by 25 basis points instead of the 50 basis point hikes that had been in vogue. A significant weakening of the rand and worsening of the inflation outlook would almost certainly mean more hikes are on the way.
Bond yields have also been spiking higher, but unlike the rand have not gone back to their early November levels. The yield on the 10-year government bond was fetching over 9.80% in late trade on Monday, compared to around 9.50% about two weeks ago.
On the domestic front, the next big test for the rand and bond markets will be the expected Cabinet reshuffle, the announcement of the new minister of electricity, and Finance Minister Enoch Godongwana’s Budget speech next week.
It remains to be seen what levels they are at then, and if the finance minister can outline credible policies that can arrest the decline. DM/BM