South Africa is being punished

 ·24 Jan 2023

January is typically a period of rand strength, says Investec chief economist Annabel Bishop – but this year, market players are punishing South Africa as the government has completely failed to allay investor concerns over the ongoing electricity crisis.

The rand has had a difficult January, weakening against major currencies in the last week – more so against the Euro and the pound than the US dollar, which has receded in its own right.

Risk aversion has subsided in global markets somewhat, as the economic outlook is not seen to be as dire for this year as was previously feared, leading to slower safe haven moves into the dollar, Bishop said. This would typically benefit a riskier emerging market currency like the rand, but this has not been the case.

The reason for this is the ongoing power crisis in South Africa, which has put investors off the country, she said. With no solution in sight from the government – and permanent load shedding expected to persist for the next two years – things do not look good.

“The persistence of load shedding has eroded investor confidence in the domestic economy, with no government solution to end the damaging effect on the productive capacity of the economy in the near term,” Bishop said.

“January typically sees seasonal strength in the rand, but this year market players are penalising the domestic currency, as the state fails to allay investor concerns over the electricity crisis, having yet to obtain additional capacity identified.”

Bishop noted that the rand weakened on the resignation of Eskom CEO Andre Du Ruyter  – planned for the end of March 2023 – and on the deteriorated relationship between the Department of Energy and the Eskom CEO.

Additionally, with Transnet’s inability to meet the demand for its rail and port transport services – which is deteriorating – investor and business confidence has been further dented, in turn afflicting the rand, she said.

Consumer strain

Consumers in South Africa are also coming under strain, Bishop said. Energy regulator Nersa has approved an 18.65% increase in electricity costs this year, which will likely have an adverse effect on inflation.

The economist pointed out that Stats SA typically captures the annual electricity price increase for CPI inflation in July.

Absent a very sharp rise in fuel prices in the month, or some other shock, the CPI inflation outcome for the month of July 2023 could actually drop to 4.3% y/y, from 4.9% y/y in June on base effects from H1.22’s high fuel and food price increases.

However, Bishop warned that the second half of 2023 – if not the second quarter already –  risks seeing higher fuel prices on a rapid reopening of the Chinese economy, which would put upward pressure on inflation.

This is already feeding through in the petrol price outlook for February, where rising global oil prices on the opening of China are pushing local prices higher. The latest data from the Central Energy Fund shows an under-recovery in prices for petrol and diesel, which could see prices pushed up by 30 cents and 6 cents per litre, respectively.

While president Cyril Ramaphosa has asked Eskom to defer the price hike, the reality is that the utility faces high and rising costs from its usage of diesel to fuel open-cycle gas turbines, and desperately needs cash injections to pay for the diesel costs – without this, the stages of load shedding will rise, Bishop said.

“Outages are expected to reduce this week as a number of units return to operation, while De Ruyter highlighted that Eskom’s “system operat(ions) are truly world-class”. However, the rand is likely to remain volatile, afflicted by domestic and global risks,” Bishop said.

In early trade on Tuesday, the rand was at the following levels against major currencies:

  • ZAR/USD: R17.18
  • ZAR/EUR: R18.71
  • ZAR/GBP: R21.31

Read: Bad news for petrol prices in South Africa

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