The Rand is worth R18 per dollar

On Monday (13 February), the South African rand broke above R18.00 to the dollar, as markets braced for further interest rate rises in the United States, casting doubt on President Cyril Ramaphosa’s pledges to tackle the continuing power crisis.

On Monday afternoon, the rand briefly traded above R18.00 to the US dollar.

The currency began the week on the back foot after analysts, investors, and economists reacted negatively to Ramaphosa’s State of the Nation Address (SONA) on Thursday (9 February).

While the SONA had a significant role in putting the currency under pressure, the rand’s depreciation is due to developments in US markets.

According to Bloomberg experts, the latest US inflation figures show consumer prices surprise on the upside, indicating that the US Fed has to do more on interest rates.

The Fed reduced its raising cycle somewhat last month, but did not explicitly state that the cycle had peaked. Higher interest rates have produced a risk-off climate, which has been particularly damaging to emerging market currencies such as the rand.

“(The reported CPI) gains are consistent with the Fed’s view that, while inflation is moderating from a four-decade high last year, further interest-rate increases will be needed to ensure price pressures are extinguished,” Bloomberg said. “Officials will also watch the behaviour of core services costs to gauge the impact of a still-tight job market on inflation.”

The rand is currently trading at the following rates:

• ZAR/USD: R18.00
• ZAR/EUR: R19.22
• ZAR/GBP: R21.70

Anxiety builds

Similar thoughts have been expressed by local economists. According to Nedbank, the rand has been under pressure for the last week as a result of a higher US currency following hawkish statements by top Fed officials, the ongoing electricity issue, and some concerning components in this year’s SONA.

Following the SONA, commentators noted that markets were tired of hearing the same promises and having no plan of action to follow through. Many crucial decisions have been deferred until the 2023 Budget, while other initiatives, such as the formation of an entirely new ministry for electricity headquartered under the president, have increased concern over the power issue.

“President Ramaphosa’s speech did not reassure investors as the announcement of a national state of disaster, and the appointment of a new Minister of Electricity in the Presidency raised some red flags,” Nedbank said.

“While it is unclear how either of these measures will help resolve the electricity crisis, it is possible to see how it could open the door for corruption, mask poor policy choices and worsen turf wars between government departments,” the bank said.

Absa’s economists said there is also little trust in promises coming from the presidency that the country’s load shedding woes are 12 months away from being eased, and even long-term plans carry serious doubts.

“We expect regular load shedding through to the end of 2024 at least,” the bank said.

“The National Energy Crisis Committee’s roadmap for ending load shedding aims to add up to 8,822MW of additional power supply in 2023 from a variety of sources, but we expect it to achieve only about half of this. It will be hard to lift the performance of Eskom’s existing plants, and new power supply takes time to procure and construct.”

Annabel Bishop, chief economist of Investec, explained why there is a trust imbalance between the president and the wider market. Bishop summarised the overall summary of each SONA since 2016, indicating that markets have been fed the same talking lines for the previous seven years – with little to show for it.

“South Africa’s slow, and often poor, implementation of its goals (promises) has been the key determinate of its weak economic growth rate, and hence of exacerbating unemployment,” Bishop said.

“The state has numerous plans, insufficient delivery and a poor track record, making the state of disaster necessary. However, after over a decade of costly expenditure on electricity and a poor-quality result, markets fear additional costs and debt for the state, which will see a deterioration of state finances, and this has negatively impacted SA’s bond market and the rand has weakened in response. ”

According to TreasuryOne, the rand has been the worst-performing emerging market currency this year, owing to the protracted power crisis and the present global risk aversion.

“Investors are hoping for clarity on the government’s plans for Eskom, which were announced in last week’s SONA, when the Finance Minister delivers his budget speech next week,” the group said.