Rand tanks as markets see no end to load shedding and Transnet woes

The rand buckled against the dollar on Tuesday (25 October), testing R18.50 – having closed last week closer to R18 against the greenback.
The loss of around 2.3% in value to date this week comes ahead of the Medium Term Budget Policy Statement (MTBPS) on Wednesday (26 October), where finance minister Enoch Godongwana is expected to announce extensive support for ailing state companies, Eskom and Transnet.
Investec chief economist Isabel Bishop noted that market sentiment is weighted heavily against such support, with domestic issues like load shedding and the negative effects of the recent Transnet trike contributing to the rand’s weakness.
She said the impact of Transnet and Eskom’s inability to consistently meet the demand for their services is growth negative – while there are no immediate solutions apparent for electricity, rail and port transport in 2022 or 2023.
“Ahead of the MTBPS this week. markets have been factoring in likely assistance from the fiscus for both Transnet and Eskom, which will lower the opportunity for fiscal consolidation, and so has undermined the rand,” Bishop said.
The government is expected to absorb at least part of Eskom’s debt onto to its balance sheet in future, with analysts forecasting around R200 billion – half of the embattled power utility’s R400 billion in debt.
“Transnet will also need substantial state financial assistance as it will reportedly be unable to operate profitability next year, as insufficient capacity to meet the demand for its services has eroded its earning capability as has been the case with Eskom,” Bishop said.
Both of these state-run companies suffer from insufficient repair, maintenance and replacement of working infrastructure following years of state capture, which has decimated their finances, and governance capabilities. More recently, the groups have also seen bulk commodities theft, the economist noted.
“Eskom has reported the theft of diesel needed to fire its open-cycle gas turbines, and Transnet has seen the loss of customers’ minerals commodities in transit and replacement with low-grade commodities instead, as the stolen high-grade goods are exported.”
Godongwana warned that urgent intervention is needed at Transnet.
Bishop said that both state companies are vital for the functioning of South Africa’s economy – as such, markets are reacting negatively to news in the risk-averse global environment.
According to TreasuryOne, markets will also be watching Godongwana’s speech for the outlook on government expenditure versus revenue while also focussing on plans around Eskom and public sector wage negotiations.
Unions have rejected the government’s offer of 3% and are demanding a 10% increase. A 3% hike would add R14 billion in unforeseen expenditure to the books for the year.
The group said the rand has also suffered, along with other emerging markets, from a massive sell-off in Chinese assets in the wake of President Xi Jinping securing a third term as leader of the Chinese Communist Party.
On Tuesday afternoon, the rand was trading at the following levels against major currencies:
- ZAR/USD: R18.47
- ZAR/EUR: R18.22
- ZAR/GBP: R20.89