Rand in limbo as grim reality for South Africa sets in

[Nat Quinn]

The South African rand is “treading water”, says Investec chief economist Annabel Bishop, stuck between more positive global conditions and little in the way of progress on the domestic front.

On Tuesday morning (10 January), the local unit held its ground just above R17.00 to the dollar, not making any significant gains or losses in the markets.

The currency is stronger than the R17.50 readings last week but still weaker than the R16.80 reading at the start of the year.

This stasis is being driven by two competing forces: a softer dollar as market risk aversion pulls back somewhat from the end of last week’s US labour market figures – benefitting emerging markets including the rand – and a flat January 8 statement from the ANC, promising developments and progress on the local economic and governance front, but little to show for it.

“The ANC 8th January policy statement released after its conference highlighted the need to repair infrastructure, improve SOEs, reindustrialise and improve education, among other objectives,” Bishop said.

“However, the policy statement was met with little market reaction as implementation is expected to continue to lag on growth-enhancing reforms – such rail, ports, electricity, water etc. – and be insufficient.”

The grim reality is that South Africa has a persistently weak economic environment, with insufficient economic growth and job demand in the face of very high unemployment, the economist noted.

This is further damaged by the inability of the state monopolies, Eskom and Transnet, to meet the demand for their services.

Given this situation, even beneficial global market conditions can do little to improve local sentiment.

“Little improvement is expected this year,” Bishop said.

On a more positive note, the economist said that inflation is coming down faster than expected, with the Eurozone seeing a drop to 9.2% y/y from the prior month’s 10.1% y/y for its CPI inflation, and this week US CPI inflation is out on Wednesday (11 January).

“A drop to 6.5% y/y from 7.1% y/y is expected, down from 9.1% y/y in June last year, as energy costs and commodities prices in general waned – although US services price pressure are still rising. A higher outcome would weaken the rand further,” Bishop said.

Feeding positive sentiment in global markets, supporting a stronger rand, are a number of US data readings that came out weaker than expected last month, adding to hopes that the US would stick to a slowing rate hike trajectory, which would weaken the dollar. However, Bishop warned that volatility is still likely in the data, and so for the rand.

“China’s reopening has room to lift sentiment, however, which may result in a better than expected GDP outcome for the country in Q1.23, although markets retain some skepticism, with substantial Covid-19 outbreaks and state reactions seen as risks.

Europe, meanwhile, has coped better with winter heating and other fuel demand than feared so far, which has added to some improved sentiment, while a particularly warm January is now underway, easing the gas crisis, she said.

Locally, some progress may be made to ease the ongoing electricity crisis, with a ruling in the courts expected on Karpower in early 2023  – near the end of March.

This relates to the environmental approval needed to bring Karpowerships into South Africa’s ports, with the gas-fuelled energy production able to provide a life line for the economy.

“The Minister of the Department of Forestry, Fishing and the Environment, Barbara Creecy, is reported to have said last year the application for Karpowerships to operate in SA contained “material and fatal” omissions,” Bishop said.

However, the minister also noted that the department could “remit the matter … so that the various gaps in information and procedural defects in relation to the public participation process that led to the rejection of the environmental authorisation application may be addressed”.

Easing the ongoing crisis will go a long way to improving local sentiment, as data published this week shows that load shedding remains a massive burden on businesses and the wider economy – with many analysts raising red flags for South Africa’s prospects in 2023 as a result.

The department is expected to respond by the end of Q1.23 as Karpower refiles its application this quarter, with a number of additional studies required, including a reported acoustic study.

However, Bishop warned that the process is not expected to be quick.

 

Rand in limbo as grim reality for South Africa sets in (businesstech.co.za)

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