Rand on the ropes as power crisis, US rate hikes deliver double blow
The scale of rotational power cuts and the pace of US interest rate hikes are key factors behind the rand’s slump, which has taken it to three-year lows above R18.80/$ and within striking distance of its record trough above R19/$.
The rand’s latest battering comes amid growing fears that the power crisis is set to worsen, with talk of a grid collapse and a total blackout becoming more frequent among the chattering classes.
“South African media is rife with references to a ‘total blackout’ – a total collapse of the national energy grid. This anxiety is also reflected in the rand exchange rate, with the South African unit being one of the worst-performing emerging market currencies so far this year,” Jacques Nel, head of Africa Macro at Oxford Economics Africa, said in a commentary this week.
There is simply no confidence left on this front, which is not a solid foundation for a currency.
The rand on Wednesday fell to R18.875/$, its lowest level against the greenback since May 2020 when the economy was collapsing under the weight of Covid-19 restrictions. Early on Thursday it was hovering around R18.86/$, which is just a stroll away from its all-time low of R19.03/$, which was reached in April 2020.
Rolling blackouts have slashed economic growth while simultaneously fuelling inflation because of the additional costs businesses need to rely on to keep their operations liquid. Forecasts for South African economic growth this year vary from 0.1% to 0.9% and are likely to be revised lower, while the economy may well be stuck in a recession.
Against this backdrop, US interest rate hikes have exceeded South Africa’s, taking the shine off rand assets and forcing the Reserve Bank’s hand to keep pulling the trigger. It surprised the markets in March with a 50-basis point hike.
“The Sarb could surprise again with another 50-basis point hike on 25th May, but this would still leave South Africa’s interest rate hikes (4.75% if it hikes this month by 50 basis points) below that of the US which has hiked by a full 5.00% in the current rate hike cycle,” Investec chief economist Annabel Bishop said in a note.
The rand’s woes will also fuel inflation further, adding to a cost-of-living crisis underlined by food inflation which was running at 14% in the year to March. DM/BM