Rand takes a beating as local issues mount
The rand is taking a beating in markets this week as a combination of local and global issues weighs the currency down.
The local unit was trading at R18.22 to the dollar on Friday morning (17 February) having broken and settled over the R18 to the dollar mark earlier in the week.
The rand had been on the cusp of R18 for much of the week, but was pushed over the edge after strong economic data in the US raised flags for further rate hikes by the Fed.
Locally, rating agency Fitch issued a stern warning over the ongoing load shedding crisis, while investor sentiment soured as the governing ANC pushed harder into far-left policies and alliances.
According to Investec chief economist Annabel Bishop, investors are concerned about a leftward shift in the ANC’s orientation, following the party’s coalition with the EFF in a number of municipalities.
“Should this alliance extend to the national government following next year’s election, business interests would be undermined and already lacklustre economic growth would be further hampered,” she said.
“Business sentiment is already at a low ebb due to a decrease in economic productivity caused by load shedding, deteriorating rail and port transport capacity and water supply insecurity.”
The shift exacerbates the negative sentiment that followed the South African Reserve Bank’s revision of the country’s growth prospects last month.
The central bank revised its GDP growth forecast for this year to 0.3% y/y, after Eskom’s announcement that load shedding is likely to be permanent this year. The SARB also lowered its economic growth rate forecast for the next two years.
Ratings agency Fitch said that the ongoing load shedding crisis left very little room for the national government to absorb economic shocks. The group also expressed doubts that the government would be able to execute its plans to mitigate the crisis.
According to the agency, the recent announcement of a national state of disaster over the energy crisis by President Cyril Ramaphosa, shows that the energy crisis has continued to deteriorate.
And while it is possible for the state of disaster and the appointment of a minister of electricity to strengthen the government’s capacity to respond to the power shortage –the government’s generally poor track record on execution and Eskom governance problems will likely have the opposite effect, with Fitch suggesting that further delays are now possible.
This sentiment was also evident in rating agency Moody’s assessment of the situation.
Moody’s warned last week that “South Africa’s longest-ever stretch of power cuts is credit negative”, adding that it “expects the government will accelerate the delivery of new power generation licences, which will allow investment in utility plants, leverage economies of scale and liberalize the South African energy market.”
However, “implementation risks are significant and any real effects will take time to materialise,” the group said.
Moving abroad, global financial markets are concerned about the pace of disinflation, Bishop said.
“Federal Reserve Bank Chair Jerome Powell recently warned that returning inflation to its 2% target will take ‘quite a bit of time,’ as evidenced by recent strong US employment data figures. The US dollar has strengthened over February, as risk sentiment has deteriorated somewhat on a recalibration of expectations for a more moderate descent in US core inflation.”
According to analysis from TreasuryOne, hotter-than-expected retail sales numbers from the US reinforced expectations of the Fed keeping rates higher for longer, with the terminal rate now forecast at 5.25%, up from 5.0%.
The hawkish tone of the Fed on rates has kept the rand under pressure for months, feeding a risk-off environment that hits emerging markets.
Foreign investors have flooded out of South Africa’s local bond market, with Bishop noting that foreigners have sold R6.7 billion worth of South African equities since the announcement of permanent load shedding.
On Friday, the rand was trading at the following levels against major currencies:
- ZAR/USD: R18.22
- ZAR/EUR: R19.35
- ZAR/GBP: R21.72
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