Rand looking at a stronger finish to 2023

The rand has seen significantly strengthened over the last month, and it could extend these gains for the rest of the year.

The rand was one of the worst-performing major currencies in the world in the first half of the year, climbing to an all-time high of almost R19.82/$ in May.

However, the currency has significantly improved over the last week as investors look to risker investments.

Last week, the rand reached R17.42/$, R19.35/€ and R22.49/£, with global financial markets looking for riskier assets.

Annabel Bishop, Investec’s Chief Economist, said that foreign investors have bought R11.3 billion of South African bonds in July – R25.8 billion since the start of June – which helped strengthen amid the dollar softening.

Bishop said that markets viewed the Federal Open Market Committee’s (FOMC’s) decision to hike rates by 25 basis points last week positively, with it looking likely that the current US interest rate hike cycle has ended, encouraging the market to look for riskier investments.

“No further changes are anticipated to US interest rates this year, and markets are only essentially fully factoring in cuts in US interest rates from Q2 2024. However, this has cheered investors, as has the likelihood of a large stimulus package for China,” she said.   

The IMF warned that China’s recovery is losing steam, partly due to unresolved real estate issues, with negative cross-border spillover.

Foreign demand in China remains weak, as rising and elevated youth unemployment is indicating labour market weakness.

“Stronger policy support in China particularly through transfers to households, could further sustain recovery and generate positive global spillovers. Scope exists for more favourable surprises to domestic demand around the world,” the IMF said in its World Economic Outlook for 2023.

With markets being incredibly risk-averse recently, Bishop said that markets are starting to look for the positives, even if they are minimal.

“After a long period of risk-off (since April 2022), the markets are seeking good news, even marginal expectations of improvements, and this is seeing the rand gain, with further strength possible against the crosses in the remainder of this year.”

Load shedding relief

She added that load shedding has been less severe in June and July, which has helped to strengthen the rand.

However, a number of renewable energy projects have been inhibited by rising interest rates – the repo prime lending rates are currently at 8.25% and 11.75%, respectively, which have added to operating costs.

That said, more positively, Minister for Electricity Kgosientsho Ramokgopa recently announced a “one-stop shop” for power procurement that will speed up processes for independent power producers (IPPs).

The National Electricity Regulator of South Africa (Nersa) also approved the operating license for one of three companies that Eskom will be unbundled into – the National Transmission Company of South Africa (NTC).

A recent update Energy Action Plan from the Eskom Energy Action Plan said that Electricity Regulation Amendment Bill is being amended to create a competent electricity market.

This will also allow consumers to purchase electricity from other suppliers, enabling competition and efficiency from several generators.

In addition, it noted that the amount of rooftop solar in South Africa has increased to 4,000 MW, which has helped to reduce load shedding in the winter months.

Read: 25 projects underway to resolve load shedding in South Africa