Rand suffers as local troubles worsen

The rand is losing ground in markets this week as a mix of domestic and global factors weighs on the currency.

On Friday morning (17 February), the local unit was trading at R18.22 to the dollar, having breached and settled above the R18 to the dollar threshold earlier in the week.

The rand had been hovering around R18 for much of the week, but it was pushed over the brink after solid economic statistics in the United States boosted the prospect of future Fed rate rises.

Locally, Fitch issued a severe warning about the continued power shedding situation, while investor mood deteriorated as the ruling ANC pushed more into far-left policies and partnerships.

Investors are concerned about a leftward change in the ANC’s direction as a result of the party’s cooperation with the EFF in a number of municipalities, according to Investec head economist Annabel Bishop.

“Should this alliance extend to the national government following next year’s election, business interests would be undermined and already lacklustre economic growth would be further hampered,” she said.

“Business sentiment is already at a low ebb due to a decrease in economic productivity caused by load shedding, deteriorating rail and port transport capacity and water supply insecurity.”

This move exacerbates the negative attitude that arose in the aftermath of the South African Central Bank’s downgrade of the country’s economic forecasts last month.

With Eskom’s declaration that power shedding will likely be permanent this year, the central bank reduced its GDP growth prediction for this year to 0.3% year on year. The SARB also reduced its prediction for economic growth over the following two years.

According to Fitch, the persistent load shedding situation has left the national government with very limited room to absorb economic shocks. The organisation also voiced reservations about the government’s ability to carry out its measures to alleviate the problem.

According to the organisation, President Cyril Ramaphosa’s recent declaration of a national state of calamity due to the energy crisis demonstrates that the situation has worsened.

This sentiment was also evident in rating agency Moody’s assessment of the situation.

Moody’s warned last week that “South Africa’s longest-ever stretch of power cuts is credit negative”, adding that it “expects the government will accelerate the delivery of new power generation licences, which will allow investment in utility plants, leverage economies of scale and liberalize the South African energy market.”

However, “implementation risks are significant and any real effects will take time to materialise,” the group said.

Moving abroad, global financial markets are concerned about the pace of disinflation, Bishop said.

“Federal Reserve Bank Chair Jerome Powell recently warned that returning inflation to its 2% target will take ‘quite a bit of time,’ as evidenced by recent strong US employment data figures. The US dollar has strengthened over February, as risk sentiment has deteriorated somewhat on a recalibration of expectations for a more moderate descent in US core inflation.”

According to TreasuryOne research, stronger-than-expected retail sales figures in the US bolstered predictions that the Fed will hold rates higher for longer, with the terminal rate now anticipated at 5.25%, up from 5.0%.

For months, the rand has been under pressure due to the Fed’s aggressive stance on interest rates, which has fueled a risk-off climate that has harmed developing economies.

Foreign investors have fled South Africa’s domestic bond market, according to Bishop, who claims that foreigners have sold R6.7 billion in South African shares since the announcement of prolonged power shedding.

The rand was trading at the following values versus major currencies on Friday:

• ZAR/USD: R18.22
• ZAR/EUR: R19.35
• ZAR/GBP: R21.72