Although the international financial market largely drives rand movements, idiosyncratic domestic developments are causing more pain than expected, says the Bureau for Economic Research (BER).
In its latest weekly review, economists from BER said that while it’s difficult to pinpoint the exact reasons for currency moves, increased anxiety about the domestic power crisis, including concerns that it could get worse in coming months, has contributed severely to currency loss of late.
By the start of May, the country had already experienced more load shedding than the total recorded in 2022.
On Friday (12 May), the South African rand tanked to its lowest level in recorded history at R19.47 the dollar. The BER said that the accusations by the US that South Africa supplied weapons to the sanctioned Russia tipped the already pressured currency lower.
The BER said that it is often the case that international developments take the cake for determining the rands trajectory. For example, we see the rand and other emerging market (EM) currencies weaken because the dollar strengthened on the back of solid US data and changing interest rate expectations, rather than something that happened in South Africa, said the BER.
“Due to SA’s deep and liquid financial markets, the rand is also often seen as a proxy for investor sentiment towards emerging markets in general,” said BER.
Despite this, other emerging currencies are not experiencing the same depreciation as the rand.
The rands failing are also not just tied to the US dollar but also the pound and the euro. Over the last week, the rand experienced a 5% decline against the dollar as well as a 3.5% depreciation against the pound and a record low since 2016 for the euro.
BER said that a further increase in local bond yields, resulting in lower prices, further confirms that the decline in investor sentiment is primarily driven by South Africa-specific factors rather than global or emerging market developments.
The yield on the 10-year government bond closed at 10.94% on Friday, currently standing approximately 100 basis points above the level observed at the same time last month, said the economists.
Concern over higher stages of load shedding and a possible national blackout remain downward drivers of the domestic currency as they take their toll on investor sentiment.
More frequent and severe load shedding could result in a deep GDP contraction in South Africa – spooking investors.
The BER added that another reason for a weaker rand is that some key South African export commodities have seen their prices decrease, with little prospect of them turning around any time soon.
“This weighs on our terms of trade and foreign trade balance, with the current account deficit set to worsen significantly through 2023,” said the group.
The National Treasury has also provided more bad news for the country’s economy, expecting South Africa to fall short of its primary surplus budget goal for the fiscal year ending in February 2023.
According to BER, this is primarily due to higher-than-anticipated VAT refunds. Additionally, the government wage bill is projected to exceed the allocated budget for 2023/24, and there is pressure on revenue due to a sluggish economy and lower commodity prices, said the group.
As a result, the financial ratios for this fiscal year are expected to be worse than what was initially anticipated in the February budget. These two deficits hurt the value of the currency, said the BER.
“A deteriorating trade, fiscal and real GDP outlook could have negative implications for SA’s sovereign credit rating,” added the group.
Furthermore, while not a new development, the greylisting of SA by the Financial Action Task Force (FATF) does not help with sentiment towards the country.
At the same time, the relatively smaller interest rate differential between South Africa and ‘safe’ advanced economies (due to the significant increase in advanced economy interest rates) makes South African financial assets relatively less attractive, said the group.
The rand is currently trading at: