Self-inflicted pain makes SA rand a sore thumb

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The rand’s weakness was thrown into stark relief when it tumbled to a record low at the tail end of last week. 

The domestic currency’s sharp decline, which saw it hit R19.52 to the US dollar, was largely associated with the diplomatic furore that erupted after US ambassador to South Africa Reuben Brigety accused the state of supplying arms to Russia — an allegation which, if found to be true, could severely jeopardise trade relations between Pretoria and Washington.

But the rand has been characterised by weakness for much of this year, having already fallen from around R17 to the US dollar to R18.30 between the beginning of this year and this month. A year ago, the rand was trading at about R16.

According to analysts, the rand (usually a bellwether of other emerging market currencies) has been marked by a largely self-inflicted fragility. Local idiosyncrasies, including the country’s deleterious energy crisis, have caused the currency to suffer a more extreme depreciation than would otherwise have been expected — making it stick out among its emerging market peers. 

The emerging market currency index, which measures the total return of a basket of 25 currencies, is up against the dollar by about 1% year to date, Stanlib chief economist Kevin Lings noted this week. The rand has fallen by 15.26% year on year.

According to Lings, other emerging market currencies are not necessarily rallying but — compared to the rand — they are holding their own. 

“The rand has significantly underperformed in emerging markets. And that is despite South Africa putting up interest rates fairly aggressively,” Lings said.

“So, you can’t blame this on emerging markets weakening. That’s not true. You can’t blame it on dollar strength. You can’t say the rand is weak because South Africa didn’t put up interest rates and fight inflation. That’s not true … 

“The reason is that domestic factors have undermined that. So, this is South Africa’s own doing.”

The fact that the rand seemed to be moving out of step with global trends was flagged by the South African Reserve Bank (Sarb) in its Monetary Policy Review, released last month.

The rand, like other emerging market currencies, is vulnerable to changes in the value of the dollar which, during the currently tight financial conditions, is highly influenced by the US Federal Reserve’s interest rate decisions. 

The Fed has raised interest rates 10 times since March last year, bringing borrowing costs to their highest level since September 2007. The higher interest rates rise, the more demand for the dollar there is from investors seeking yields.

In order to offset the currency impact of Fed hikes, emerging markets have had to follow suit, raising their interest rates to avoid a sell-off. Most emerging markets, including South Africa, started raising their interest rates long before the Fed.

The rand is a high beta currency, meaning it is relatively sensitive to broader market movements. For this reason, the Sarb’s Monetary Policy Review noted, it is unsurprising that the rand appreciated in line with the emerging market trend in the closing months of last year and then depreciated again until March. 

“The depreciation period was, nonetheless, more extreme than would have been expected given the normal relationships with global conditions,” the review added. 

The rand was around 9% weaker between November and February than would have been predicted based on historical beta values. 

According to Momentum Investments economist Sanisha Packirisamy, the rand started to diverge significantly from other emerging markets during the fourth quarter of last year. 

“There are definite idiosyncratic factors — SA-specific issues — that are negatively impacting the rand that are not necessarily affecting other emerging market currencies right now.”

The Monetary Policy Review also attributed the divergence to specific local factors, “including the consistently negative local news flow for this period”.

The bleak news cycle began in December, when investors mulled the prospect of President Cyril Ramaphosa stepping down in the wake of the so-called Phala Phala scandal. 

Although the president did not resign, the months that followed were characterised by severe load-shedding and questions over governance at Eskom. 

To add insult to injury, on 24 February, South Africa was greylisted by the Financial Action Task Force, a predicament that many had warned would cost the country’s already fragile economy.

The Bureau for Economic Research (BER) also noted the role local factors seem to be playing in the rand’s movements.

A further sign of this, the BER said, is that the rand’s losses have not been solely against the dollar but also against a basket of currencies from South Africa’s major trading partners. The currency lost about 5% week on week against the dollar last week but also depreciated by more than 3.5% against the euro and pound, according to the BER.

“One of the likely reasons sentiment towards SA soured so remarkably in recent weeks is increased talk around the real possibility of higher-stage (8 or 10) load-shedding or even a total grid collapse. 

“This could result in a deep GDP contraction which rightfully spooks investors,” the BER said.

Lings agreed, saying that the severity of the country’s energy crisis has come into full focus.

In March, the Sarb revised its GDP forecast lower to 0.2%, reiterating that the energy crisis stands to shave two percentage points from growth this year. The central bank’s forecast was still higher, although only slightly, than that of the International Monetary Fund, which expects the country’s economy to grow a mere 0.1% this year.

Meanwhile, the commodity boom — which buoyed the country’s economy in 2021 and 2022 — has started to taper off, with prices moving decidedly lower. Lower commodity prices mean that the tax revenue windfall that South Africa’s fiscus has benefited from in the past two fiscal years has largely ended, the BER said.

The rand will probably continue to be underpinned by weakness, as the risks to the economy show little sign of letting up, Lings said.

In its latest statement, the Sarb’s monetary policy committee revised the implied starting point for its rand forecast to R18.06 to the US dollar, compared with R17.32 at the time of the previous meeting. The committee also signalled further currency weakening.

According to the BER, the average for the second quarter so far is almost 30 cents weaker — but with the rand closing above R19 on Thursday and Friday, this average is being pulled up rapidly.

The monetary policy committee is set to meet next week to decide on its next repo rate hike. At its last meeting, in March, the committee unexpectedly raised the borrowing rate by 50 basis points, citing still sticky inflation.

The rand’s marked weakness means that economists have not counted out another 50 basis point hike, though many still expect a less aggressive 25 basis points, given the country’s economic position.