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The South African rand broke through R18.00 to the dollar on Monday (13 February) as markets strap in for further interest rate hikes in the United States, and cast doubt on president Cyril Ramaphosa’s promises to resolve the ongoing power crisis.
The rand briefly traded above R18.00 to the dollar on Monday afternoon.
The currency started the week off squarely on the back foot following a cold response from analysts, investors and economists towards Ramaphosa’s State of the Nation Address (SONA) on Thursday (9 February).
While the SONA played a key part in keeping the currency under pressure, the rand’s weakness is more as a result of movements in US markets.
According to Bloomberg economists, US inflation numbers coming out are pointing to consumer prices surprising on the upside, signalling that more needs to be done by the US Fed on interest rates.
The Fed eased its hiking cycle slightly last month but did not outright point to the cycle peaking. The higher interest rates have created a risk-off environment which has hit emerging market currencies like the rand particularly hard.
“(The reported CPI) gains are consistent with the Fed’s view that, while inflation is moderating from a four-decade high last year, further interest-rate increases will be needed to ensure price pressures are extinguished,” Bloomberg said. “Officials will also watch the behaviour of core services costs to gauge the impact of a still-tight job market on inflation.”
The rand is currently trading at these levels:
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ZAR/USD: R18.00
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ZAR/EUR: R19.22
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ZAR/GBP: R21.70
Anxiety builds
Local economists have echoed similar sentiments. Nedbank said that the pressure on the rand has intensified over the past week, caused by a stronger US dollar following hawkish comments by senior Fed officials, the ongoing electricity crisis, and some worrying elements in this year’s SONA.
Commentary following the SONA pointed to markets getting tired of hearing the same promises and having no plan of action to follow through. Many important decisions have been left to the 2023 Budget to expand on – while new measures, like the appointment of an entirely new ministry for electricity housed within the presidency, have caused more anxiety over the power crisis.
“President Ramaphosa’s speech did not reassure investors as the announcement of a national state of disaster, and the appointment of a new Minister of Electricity in the Presidency raised some red flags,” Nedbank said.
“While it is unclear how either of these measures will help resolve the electricity crisis, it is possible to see how it could open the door for corruption, mask poor policy choices and worsen turf wars between government departments,” the bank said.
Absa’s economists said there is also little trust in promises coming from the presidency that the country’s load shedding woes are 12 months away from being eased, and even long-term plans carry serious doubts.
“We expect regular load shedding through to the end of 2024 at least,” the bank said.
“The National Energy Crisis Committee’s roadmap for ending load shedding aims to add up to 8,822MW of additional power supply in 2023 from a variety of sources, but we expect it to achieve only about half of this. It will be hard to lift the performance of Eskom’s existing plants, and new power supply takes time to procure and construct.”
Investec chief economist Annabel Bishop clearly laid out why this trust deficit between the presidency and wider markets exists. In the banking group’s SONA review, Bishop summarised the general overview of each SONA since 2016, revealing that the same talking points have been fed to markets for the last seven years – with little to show for it.
“South Africa’s slow, and often poor, implementation of its goals (promises) has been the key determinate of its weak economic growth rate, and hence of exacerbating unemployment,” Bishop said.
“The state has numerous plans, insufficient delivery and a poor track record, making the state of disaster necessary. However, after over a decade of costly expenditure on electricity and a poor-quality result, markets fear additional costs and debt for the state, which will see a deterioration of state finances, and this has negatively impacted SA’s bond market and the rand has weakened in response. ”
Analysis from TreasuryOne showed that the rand remains the worst-performing emerging market currency this year on the back of the ongoing power crisis, along with the current global risk aversion.
“Investors are hoping for clarity on the government’s plans for Eskom, which were announced in last week’s SONA, when the Finance Minister delivers his budget speech next week,” the group said.
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