Perfect storm hits South Africa – tanking the rand to its worst levels ever

[Nat Quinn]

The South African rand tanked to its weakest point on record on Friday (12 May), sinking to R19.47 the dollar in early intra-day trade before pulling back to around R19.30.

The rand suffered another significant blow on Friday as finance group JPMorgan cut the country’s GDP forecast on expectations of more power cuts. This comes on the back of the US embassy accusing South Africa of arming Russia, and investor fears over the country’s grid collapsing.

According to Reuters, JPMorgan forecasts recession for South Africa, projecting a 0.2% decline in South Africa’s 2023 GDP versus a previous forecast of 0.3% growth.

Reuters reported that investor sentiment regarding South Africa was largely negative as rolling blackouts showed no sign of slowing down.

April 2020 marked the previous lowest point for the currency during the Covid-19 pandemic when it hit R19.35/USD.

These factors are currently hitting the currency:

• Persistent load shedding, with escalating levels expected in the coming months

• Expectations of extremely low growth to recession for the economy as a result of blackouts

• Market fears over grid collapse, with no plan of action in place

• South Africa has been accused of arming Russia by the US embassy

• Investors are concerned about the future of preferential trade agreements between the USA and South Africa

• Worries linger over South Africa’s Just Energy Transition amid talk of extending the use of coal power plants

• The Dollar remains on the front-foot thanks to its safe-haven status

Adding insult to injury, the US ambassador announced that he was confident that a Russian ship had picked up weapons in South Africa last year – dragging foreign investor sentiment even further.

This comes after the rand has been slipping over the past few months as investors grew more risk-averse and steered clear of its volatility.

Indications of downward momentum was shown by TreasuryONE, which reported there was a mass sell-off of domestic bonds worth around R7 billion in the earlier parts of this week.

“The market is worried about stagnation in the local economy, and investors do not want to invest in a country with a poor short-term outlook,” TreasuryONE said.

Speaking at a public lecture this week (10 May), the governor of the South African Reserve Bank (SARB) said that the rand had been one of the worst-performing emerging market currencies this year.

ETM Analytics added that only once there is a concrete plan to end load shedding the rand’s weak position will persist.

Although load shedding remains an issue, cosy ties with Russia are now adding salt to the wound.

According to Intellidex director Peter Attard Montalto, the latest allegations from the US embassy on South Africa’s ties to Russia are one of several factors that have nailed the country.

Even though South Africa’s ties to Russia are not new, it does appear that the US and investors are no longer buying the government’s claims that it remains neutral in the headline geopolitical event of the last year.

There has been brewing concern about foreign policy from investors for over a year, Attard Montalto said, since the start of the war in February 2022, when Russia invaded Ukraine.

There has been a souring of impressions from the US over this time, he said, and this culminated in increasing chatter from the US embassy, which has now resulted in the latest allegations.

“This didn’t come out of nowhere, this has been a long train of worry from the US,” he said. This is alongside the concerns over money laundering and terrorism financing – which led to South Africa being greylisted by the Financial Action Task Force – and troubles with the Just Energy Transition.

Markets reacted negatively to the news due to South Africa’s economic ties to the United States through trade agreements like the African Growth and Opportunity Act (AGOA), which amount to billions of rands in trade each year.

“Investors are now worrying about the economic implications of this – not only from AGOA, but from a generally cutting off of cooperation for aid and other funding as well,” Attard Montalto said.

There are a range of different supports that the US provides South Africa. With AGOA, there is a renewal cycle coming up for that, which is now at risk – but there’s also a lot of aid and technical support the US provides the country. Various government and non-government entities could be affected.

While South Africa will definitely feel the impact of the geopolitical snafu, Attard Montalto said the country is still likely some way off from sanctions.

What the embassy’s address does indicate, however, is that the US is now clear that it does not believe South Africa when it says it is not aligned in the Russia-Ukraine war.

This is something investors have not believed for a while, Attard Montalto said.

“It’s the implications of going down that route, and basically choosing Russia, that will have more dramatic implications in the future – which could include sanctions,” he said. “But I don’t think we’ll see a dramatic pullout of US companies and things like that.”

Adding to the storm is the energy crisis. The US is one of several countries that have signed on to South Africa’s Just Energy Transition (JET), and these agreements could now be at risk.

Attard Montalto said that the JET has been in trouble for some time, however, with utterances from the electricity minister around delaying the shut-off of coal power stations being one of the more recent problems that have arisen.

“There have been problems through the second half of last year already – so (the US embassy’s position) isn’t a new problem necessarily, but it does reinforce the problems of getting money to support the transition.”

The analyst said that the selloff of the rand on Thursday following the embassy’s press briefing came after several days of rand weakness, which came off the back of blackout risks and panic over grid collapse.

He said that understanding of a possible grid collapse is low, and while there is a non-zero probability that it will happen, it’s highly unlikely.

Instead, the real concern is that there seems to be no plan to handle this low-probability event, while all announced plans of action focus on longer-term energy security with nothing to help the grid in the short-term.

In the short-term, elevated stages of load shedding, to stage 8 and beyond, are far more likely, he said.

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