The rand had a punishing week last week, dropping to a new record low against the dollar – with many economists and analysts expecting a rougher time for the currency ahead.
While harsh market conditions have kept the local unit on the back foot for much of the year, last week saw foreign investors take a much tougher position against South Africa – and the government’s foreign policy is to blame.
According to economists at Nedbank, the rand has been carrying South Africa’s risk premium for much of the year but was dragged to a new record position against the dollar on Thursday at R19.92/$ due to the “deeply negative sentiment” towards the country.
This was caused by South Africa’s “anti-Western rhetoric”, the group said, and Pretoria’s ever-closer ties to Russia.
“This past week, the focus was on the government’s decision to extend diplomatic immunity to all BRICS visiting heads of state and their representatives to avoid acting on the ICC arrest warrant for Vladimir Putin,” it said.
However, International Relations Minister Naledi Pandor’s comments at a meeting with her BRICS counterparts in Cape Town on Thursday and Friday did South Africa no favours.
“Minister Pandor criticised developed nations for failing to reform and transform global institutions. She went even further, downplaying the global impact of the war on Ukraine by referring to the war as a ‘regional conflict’ which should not be allowed to replace global poverty eradication as the world’s ‘greatest challenge’,” Nedbank said.
Even though Russia’s brutal war on Ukraine directly caused the surge in global oil and food prices over the past year, Pandor directed the blame for the cost-of-living crisis in developing countries towards advanced countries.
She said that “…the attention and resources of our Western partners have been diverted, and the agendas of our multilateral organisations no longer respond to the needs and demands of the Global South.”
Nedbank said that this is a statement “overwhelmingly countered by the facts”.
Especially given the consistent support offered to South Africa’s development by the US, the EU and Japan, including NGO grants, other charitable initiatives, favourable just transition funding, and the non-reciprocal preferential trade deals of the Africa Growth and Opportunity Act and the European Partnership Agreement, the bank said.
The South African government has come across as two-faced in its recent foreign policy, seeking to mend fences with Western nations like the US – especially in light of recent allegations that South Africa loaded arms onto a Russian vessel – while also delivering acrimonious statements against them.
Pretoria has been highly critical of the United States and NATO, often blaming them for Russia’s invasion of Ukraine while referring to Russia – the aggressor in the war – as a “friend”. Despite its claims of neutrality, the government has been happy to host Russia for war games on the anniversary of the war, as well as allowing sanctioned vessels to land or dock in the country.
At a base level, as persistent rand weakness indicates, markets are not convinced South Africa is as neutral as it claims to be.
“All these developments undermined confidence in the domestic economy, raising the country’s risk premium even further,” Nedbank said.
And the fallout can be even greater than it first appears.
Last week, the South African Reserve Bank (SARB) added two new risk factors to its financial stability review: the impact of potential secondary sanctions due to South Africa’s foreign policy, and greater risk of capital outflows.
Nedbank said that the potential economic and trade costs of damaging relations with the US would be significant – and it could also extend to other US allies.
“If there is a complete breakdown of SA-US relations, the EU will likely follow the US. This would greatly cost the country, with most of the impact expected to come through the financial markets and global trade, with very negative impacts on economic growth and job creation.
“South Africa has strong trade links with both the US and EU. The EU, as a bloc, is our largest trading partner, while the US is our 3rd largest trading partner among individual countries after China and Germany.”
In a worst-case scenario, where the USA and EU withdraw from their respective trade deals, R443 billion worth of exports will be placed on the line, Nedbank said.
In addition, South Africa relies on foreign funding to cover shortfalls in its current account and budget balance.
“It is also worth noting that the bulk of the government’s debt is financed by the West and Asian investors from countries aligned with the US. If our ties with the US and the EU were to be severed, the ripple effects would extend far and wide, threatening financial stability,” it said.
In light of this, Nedbank said it is worrying that the South African government appears to be taking every measure to act against its own interests through its approach to foreign policy.
“Government’s perceived support of Russia has compromised SA’s neutral stance on the conflict between Russia and Ukraine. It has already hurt the economy, and any further escalation could permanently fracture or break relations with our largest trading partners, with potentially severe consequences,” the bank said.
The rand has recovered from its weakest point, trading at around R19.45 to the dollar on Monday. However, the recovery has little to do with a change in risk premia associated with South Africa, and is rather tied to a softer dollar as markets anticipate a hold on rates by the US Fed.