The first week of March certainly provided market participants with more than enough adrenaline, according to Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions, who noted that local factors left their mark on the rand this week – particularly president Cyril Ramaphosa’s commitment to nationalising the Reserve Bank.
The ANC has taken a decision to nationalise the central bank and it will be implemented, the president told parliament in Cape Town on Thursday, stressing that there is no hidden agenda.
“Thursday can be described as nothing short of a bloodbath for the rand, which had already started the day on the back foot,” Botes said.
“Numerous factors contributed to the tumble, with the most significant event being the announcement by president Ramaphosa that government will proceed to nationalise the South African Reserve Bank. This has long been a highly contentious matter, with condemnation from rating agencies as well as the public.
“The rand lost just over 1% as Ramaphosa delivered his statement in Parliament yesterday, causing havoc in dealing rooms everywhere,” Botes said.
Once the shock factor dissipates and rationality returns, analysts will look to answer key questions regarding the nationalisation, of which the most prominent are likely to be the matter of mandate as well as independence, the analyst said.
“While the current shareholders of the SARB have no influence – direct or indirect – on the mandate of the SARB, one cannot help but wonder whether this will remain the case once the one and only shareholder becomes a governing body that admittedly struggles to eradicate corruption in itself.
“In order for the SARB to remain the efficient and reputable backbone of the financial system in South Africa, independence will be crucial, the focus must always be the financial wellbeing of the country over the wellbeing of the governing body,” Botes said.
However, this wasn’t the only blow dealt to the rand on Thursday, as ECB president, Mario Draghi reiterated growth concerns in the European Union, indicating that interest rates are likely to rise only in 2020, while offering cheap loans to European banks in an effort to stimulate the waning economy.
“The correlation between the rand and the euro meant the rand tracked the common area currency weaker against the greenback, with the most prominent decline of the rand witnessed post market close on Thursday evening. By 6pm, the rand was trading 1.6% weaker than Thursday morning, reaching a level of R14.49/$,” Botes said.
Already strained South African consumers will feel the pinch in the coming month, as Nersa approved an Eskom tariff increase of 9.4%, while the petrol price increased by 74c/l on Wednesday.
The increased cost of fuel and electricity will add pressure to inflation that could see it rise towards the upper end of the target band. While Eskom expressed its relief regarding the approved tariff hike, it also indicated that a shortfall of R20 billion still remains, with threats of load shedding still casting a very dark shadow over growth prospects for 2019.
Local GDP figures offered a glimmer of hope as the economy grew by 0.8% in 2018, versus the expected 0.6%, with growth witnessed in agriculture, transport and manufacturing.
“However, the data is far from upbeat, remaining well below the population growth rate. On a positive note, the local current account deficit declined to 2.2% of GDP in Q4 2018, from the previous 3.7% – however business confidence once again slipped in February, declining to 93.4 points,” Botes said.
Eskom price hikes
The 9.41% increase in the price of electricity granted to Eskom is going to hit both consumers and the South African economy, said Efficient Group chief economist Dawie Roodt.
Coming on top of a 4.41% hike already approved, this could be the straw that breaks the proverbial camel’s back, he said.
“The bitter irony is that this increase together with the other increases approved for the next three years is not going to be anywhere near enough to save an Eskom that is broken and bankrupt,” Roodt said.
He said the only solution was for government to assume the R420-billion debt that Eskom owes, fire 30,000 employees, reduce salaries across the board and start from scratch.
“Eskom cannot be bailed out by consumers. The reality is that electricity consumption has dropped considerably over the years as more consumers switch to solar and other alternatives and will never return to their previous levels of consumption.”
If government assumed Eskom’s debt, it would represent close on 15% of the government’s total debt burden and ratings agencies have already signalled that this would lead to further downgrades.
“I think for the first time the full implication of state capture and the ANC’s gross mismanagement of the economy has been revealed in all its horror,” Roodt said.
The rand traded at the following levels against the major currencies on Friday:
- Dollar/Rand: R14.52 (0.08%)
- Pound/Rand: R19.01 (0.11%)
- Euro/Rand: R16.26 (0.13%)