Red flags for businesses and investors in South Africa

The rand is currently at the whim of tumultuous domestic economic factors, including ANC policy, depressed business sentiment and a national energy crisis, says Investec’s chief economist Annabell Bishop.

On Monday (13 February), the rand breached R18.00 to the dollar, experiencing substantial risk-off, losing ground on both global and South African-specific issues, said Bishop.

The rand was trading flat on Tuesday morning (14 February), with investors cautious ahead of the closely-watched US inflation report due later in the day.

“Markets are looking to the US consumer price index (CPI) for further clues about the Federal Reserve’s interest rate path, a major driver of global asset prices,” Reuters reported.

US consumer prices are expected to rise 0.5% in January, according to a Reuters poll, after a revised 0.1% increase in the prior month.

Various economic factors influence the exchange rate between the rand and the dollar, including commodity prices, interest rates, inflation rates, political stability, and global economic trends; however, generally, the rand has a negative correlation with the dollar.

Usually, when the dollar strengthens, the rand tends to weaken along with other emerging market currencies.

This is because investors often view the dollar as a safe haven asset, so they tend to buy dollars when there is economic uncertainty, which can lead to a rise in the dollar’s value relative to other currencies, including the rand.

Despite being relatively stable today, the rand is not out of the woods yet.

According to Bishop, the recently increased appetite of the ruling party ANC for municipal coalitions with divisive political parties – often deemed ‘anti-business parties’ – has negatively affected investor sentiment.

This comes as the country’s energy crisis and load shedding remain permanent for the foreseeable future.

“Businesses fear increased left-wing policies, and so the ANC is moving away from its centrist stance. The ANC’s current preferred coalition party is now the EFF, likely to push for some ANC adoption of its policies,” said the economist.

Warning over repeated attacks on South Africa’s Reserve Bank

She added that business sentiment is depressed – damaged by weakening economic productive capacity.

Lacking water supplies, and poor port and rail transport, among other things, may push the South African Reserve Bank (SARB) to revisit its GDP growth forecasts to close to zero, said Bishop.

On 26 January, the Reserve Bank revised down its GDP growth forecast for this year, from 1.1% y/y to 0.3% y/y, after Eskom’s announcement on 22 January that load shedding is likely permanent for this year.

The central bank also substantially weakened its forecast of SA’s economic growth rate for the next two years, halving it for 2024 to 0.7% y/y from the 1.4% y/y held previously and for 2025 dropped it from 1.5% y/y to 1.0% y/y, said Bishop.

Global financial markets are also showing some concern over a lengthier than hoped-for disinflation path this year, Bishop added.

“US Federal Reserve Bank Chair Jerome Powell recently warned that returning inflation to its target will take “quite a bit of time” and that the recent strong employment data “shows why we think this will be a process that takes quite a bit of time.”

“After weakening over January on the improved global economic outlook, the US dollar strengthened over February, as risk sentiment has deteriorated somewhat on a recalibration of US inflation expectations for a more moderate core descent,” said Bishop.

The next up-and-coming figures to showcase South Africa’s economic status are both inflation and retail sales figures – expected to be published on Wednesday.

According to Reuters, polled economists expect annual inflation to fall to 6.9% in January from 7.2% in December and retail sales to contract 0.1% in December from a growth of 0.4% in November.

The rand is currently trading at these levels:

• ZAR/USD: R17.84
• ZAR/EUR: R19.16
• ZAR/GBP: R21.68

Read: South Africa on the cusp of an R18 billion energy boom