New ‘Cold War’ hits the rand
The rand has been weakened on the back of significant concerns regarding Russia and the North Atlantic Treaty Organisation (NATO).
The rand weakened to R19.21/$ as increasing geopolitical tensions have prompted NATO’s allies to launch a new exercise from February to May this year – Exercise Steadfast Defender 2024.
NATO said that the exercise would be its largest exercise in decades, with participation from 90,000 troops from all 31 allied countries and Sweden.
Investec Chief Economist Annabel Bishop said that the aim of the drill is to show that the alliance can reinforce the Euro-Atlantic area through the trans-Atlantic movement of forces from North America.
Russia said that the exercise is an example of NATO returning to Cold War schemes, with the militaries being prepared for a confrontation with Russia.
“The escalation in geopolitical tensions has caused risk aversion in global financial markets to rise, weakening EM currencies and so the rand,” Bishop said.
“Safe havens have benefited, causing the US dollar to strengthen, and commodity prices have weakened.”
Other concerns
Bishop also noted that market expectations on US interest rate cuts have eased, with little to no chance of a January cut. The chance of a March cut has also dropped to below 50%, while the probability of a March cut has decreased from 100% to roughly 75%.
“The shifting in market expectations of the timing of US interest rate cuts also reduces the chance of a South African rate cut in Q1.24, with the MPC meeting this week in SA giving a reading on the economy and interest rate outlook on Thursday,” Bishop said.
The World Economic Forum also warned that world central banks have not brought inflation down enough, with the expectations of a rate cut by major banks by April seeming premature.
In addition, global financial markets are concerned that the number of commercial ships passing through the Suez Canal has dropped to a three-year low – when a ship famously got stuck on the canal.
The diversion of ships to the Cape of Good Hope has severely increased transport costs.
When looking past the international news, Bishop said that the decision by Fitch to leave SA’s credit rating (BB-) and outlook (stable) unchanged would have been supportive for the rand.
Fitch said that the economy is severely constrained by the struggles of the energy and logistics sectors and a high level of inequality.
“Although the reforms will contribute to a modest increase in real GDP growth in the near to medium term, they are limited in ambition, and we do not think they will significantly enhance South Africa’s low growth potential, which we estimate at 1.2%,” Fitch said.
“Fiscal policy continues to support this approach by stabilising debt and debt-service costs. Government reiterates that fiscal consolidation will be implemented through spending reductions, efficiency measures across government and moderate tax revenue measures.”
Read: How much prepaid electricity will cost in South Africa after the 2024 price hikes
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