The big problems South Africa just can’t seem to shake

Despite dipping below the key resistance level of R18 to the dollar on Friday (16 June), the rand has returned to levels above that point, staying frustratingly resistant to a move in a firmer direction.

According to Investec chief economist Annabel Bishop, the local unit has been supported in recent sessions by a softer dollar – but the anxieties over South Africa’s proximity to Russia hang heavy in the air, keeping investors at bay.

Bishop noted that the main drive behind the stronger rand is US dollar weakness, which has come about as global sentiment improves. Markets are more risk-on as falling inflation in key markets takes hold, raising expectations that interest rate hike cycles are nearing their end – this is accompanied by expectations that rate cuts could even follow in the foreseeable future.

“Also adding to improved global financial market sentiment, which tends to strengthen emerging market currencies such as the rand, was commentary from the Institute of International Finance (IIF) last week highlighting a soft landing for the US economy,” Bishop said.

“The IIF – the global association of the financial industry – said in particular that the US should avoid a recession, while also indicating ‘a positive outlook for capital flows to emerging markets’, with the IIF also seeing ‘a benign inflation view’.”

While risks are present, the IIF is holding a dovish view on inflation in the near term, Bishop said.

Rand under pressure

However, despite the more positive outlook globally, South Africa’s situation remains one of stress – largely because of “idiosyncratic” domestic issues.

These include:

• The prevailing electricity crisis;
• Issues with transport and Transnet, which impacts growth and state revenue;
• South Africa’s (perceived) ties to Russia by the West.

While load shedding has been suspended for most of the day for the last two weeks, the country is far from resolving its energy crisis, with energy availability and generation capacity still worse off than in 2022.

Industries, meanwhile, have lamented the deteriorating state of the roads in the country, which is impacting freight and transport, adding to the multitude of issues with logistics, rail, and port capacity.

Looming large over all of this, however, are the geopolitical risks, Bishop noted.

The IIF’s analysis of South Africa flagged its ties to Russia and potential sanctions as a key risk – a position that has been repeated time and time again in various reports looking at the country’s growth prospects.

On South Africa, the IIF notes, “the near-term direction of nonresident capital flows…will depend on whether the West imposes sanctions on South Africa, whose external financing needs look set to rise in line with its widening current account deficit.”

The IIF warned that investors will remain “extremely sensitive to any developments on South Africa’s relations with Russia” and that findings around South Africa’s ties with Russia are the key near-term risk.

“Western sanctions would trigger a sharp selloff of South African assets, increase external financing risks, and lead to potential rating downgrades,” it said.

Damage control

South Africa and the government are not oblivious to these risks, with president Cyril Ramaphosa going into damage control mode over the past week to try and cement the country’s “neutral” position towards Russia.

The president’s charm offensive has paid off somewhat, contributing to the rand strengthening from close to R20 to the dollar at the end of May/early June. Ramaphosa led a delegation of African leaders to Russia and Ukraine this past weekend, calling for an end to the war.

Despite the PR show, big questions still hang over South Africa’s ties to the invading nation. As far as perceptions go, the Western world appears unconvinced.

An investigation into allegations that South Africa supplied arms to Russia during a covert night-time visit from a Russian vessel in December 2022 is still ongoing – the results of which won’t be published publicly. At the same time, South Africa is still set to host BRICS leaders – including Russian president Vladimir Putin – for a summit in August.

Putin has an arrest warrant from the International Criminal Court (ICC), which South Africa is a party to. The country will be obligated to arrest him if he lands in the country. Efforts to find a way out of this obligation have proven unsuccessful.

Speculation has been rife that South Africa is looking to move the summit to another country to avoid having to arrest Putin, or have him attend virtually – but as it stands, the summit is going ahead as planned.

These questions and anxieties are still very much present in the market, keeping the rand from gaining ground.

Read: Ramaphosa calls for peace – as Russia threatens grain supply