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The South African rand dropped to its lowest level in almost three years on Wednesday (8 March) after the US Federal Reserve signalled room for further rate hikes, while the local economy sits on the edge of recession due to load shedding.
On Wednesday morning, the rand traded at R18.62 to the dollar, marginally weaker than its closing level on Tuesday and the weakest it has been since May 2020 – the first months of the pandemic.
US Federal Reserve Chair Jerome Powell warned on Tuesday (7 March) that US interest rates might go up even faster and higher than expected to reign in inflation – this was the biggest driver of the rands downfall, said ETM Analytics.
The dollar, on the other hand, reached multi-month highs against other major currencies.
The rand’s strength has relied heavily on the dollar losing ground. However, the market is pointing to the opposite as investors take a decidedly risk-off stance, hitting emerging markets.
“The rand’s slide was compounded by gross domestic product (GDP) figures released on Tuesday that showed South Africa’s economy contracted more than expected in the fourth quarter of last year,” reported Reuters.
Data from Stats SA showed that growth metrics for the country are likely to be revised downwards once again as GDP for the final quarter of 2022 declined by 1.3% – more than the majority of economists who predicted a 0.4% decrease.
Load shedding continues to inhibit economic activity in all sectors of the country, further making the country less attractive to foreign investors.
Investor interest in the country remains subdued compared to other emerging market currencies as a result, said ETM Analytics.
Rolling blackouts have plagued the country every day this year.
To add salt to the wound, South Africa would likely be in a technical recession if growth were to contract again this quarter.
Maarten Ackerman, the chief economist at Citadel, said: “Everything indicates that the first quarter of 2023 will also be negative because of the amount of load shedding we’re seeing at this point in time, coupled with the logistical issues faced in our rails and ports infrastructure.”
A recession can have a negative impact on the rand by decreasing its value relative to other currencies. This can occur due to factors such as reduced economic activity, lower demand for exports, and lower interest rates.
This bad news comes as the currency has been battered over the past few weeks.
The rand has been falling extensively, with the greylisting taking its toll on the currency in late February as well as the recent cabinet reshuffle on 6 March.
By 12h20 that rand was trading at these levels against major:
- R18.62/$
- R19.64/€
- R22.05/£
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