Rand crash – here’s why South Africa is back to R19 to the dollar

 ·10 Aug 2023

While the rest of South Africa took a mid-week breather to celebrate Women’s Day, the rand continued to weaken against the dollar, breaking through the R19/$ barrier once again.

On Wednesday (9 August), the rand broke through R19/$ to R19.04, before pulling back slightly to R18.95 in early trade on Thursday.

The rand last hit R19 to the dollar in early July, after spending May and June stuck above those levels due to various troubles in the country.

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. Last week, it was once again the worst-performing currency.

The kick in May came as markets worried over the stability of Eskom’s grid, while allegations of South Africa arming Russia – inviting potential sanction from the US – keep investors at bay. While all of this was happening, the country faced stubbornly high inflation and the prospect of higher interest rates.

The fallout from these woes continued in June and even July with a significant selloff locally, exacerbated by global market moves – particularly in the United States.

Contrary to the clear headwinds faced in May and June, however, the current rand weakness is less obvious.

According to an analysis from Rand Merchant Bank, the rand is underperforming “for no obvious reason”.

However, a deeper analysis shows that it is likely to do with a mix of local and global market conditions.

Broadly, the current weakness can be attributed to:

  • A deteriorating trade balance in South Africa
  • Rising oil prices globally
  • Speculative market positions on the USD and US interest rates
  • Distortions from major outflows of funds from SA in June/July
  • SA’s fiscal risks (load shedding, infrastructure, low growth et al) in a global tightening environment

Finance consultancy TreasuryOne noted that, following a strong recovery from the May selloff throughout June and July, the rand has struggled for traction in the early stages of August.

“(The rand) is trading at the mercy of external developments and shifts in market sentiment but remains ripe for a continued recovery. However, this is unlikely to be a smooth recovery, with heightened volatility expected through the coming months,” it said.

The reason for the optimistic outlook, TreasuryOne said, is because the rand is trading under its fair value.

“The USD-ZAR remains well above its risk-adjusted fair value, suggesting there is still scope for further ZAR appreciation towards R17.00/$ over the next few months,” it said.

“While the ZAR’s recovery through June and July has seen it unwind some of its undervaluation, it remains above the 75th percentile line. Historically, it has traded at these levels less than 25% of the time, meaning further recovery remains likely.”

This view is shared by Investec chief economist, Annabel Bishop, who also believes that – despite current weakness and volatility – the rand’s longer-term prospects are more positive.

However, the rand will still have to contend with shocks in the market.

While investors were more favourable to riskier assets in July, a sudden and unexpected credit rating downgrade for the United States last week turned this around. As one of the riskiest countries, South Africa lost out.

According to The Economist’s latest Big Mac Index, though, South Africa’s rand remains one of the most undervalued currencies in the world.

The rand carries a hefty risk premium – given the country’s ongoing power crisis and permanent load shedding, it’s a difficult prospect for any investor to safely put money into the country and expect growth.

The economy has stagnated and is barely expected to post positive growth in 2023 – with even the most optimistic scenarios pointing to flat growth over the next few years.

On top of the headline issues, South Africa also carries risk on the sociopolitical front, with the 2024 elections looming, and the national government leaning heavily into growth-destroying populist policies while also playing with fire in its geopolitical positioning relating to the West and Russia.

However, with great risk comes great opportunity – and with the risk premia making the rand so cheap, whenever market sentiment shifts back to a risk-on environment, the rand is likely to benefit.

“From a carry trade perspective, the ZAR continues to rank above the emerging market and developing market averages. It thus remains amongst the more attractive currencies in the world, with this owing to its undervaluation on a PPP-adjusted basis and the high real yields on offer in South Africa,” TreasuryOne said.

Read: The ‘real’ value of the rand right now – according to the Big Mac Index

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