South Africa’s rand slips further despite usual boost from weakening dollar. Find out why the currency is feeling the pressure and how low interest rates and load shedding are adding to its woes. Warning: may cause catastrophic disappointment.
Rand slips further as US dollars gain muscle, leaving South Africa in need of a workout
South Africa’s rand has been struggling despite the weaker US dollar, which traditionally leads to the strengthening of the currency. According to Rashad Cassim, the deputy governor of the South African Reserve Bank (SARB), the rand outlook is becoming more concerning after a negative February performance.
The South African currency is closely linked to the US dollar due to trade and investment ties between the two countries, which means that various economic and political factors affect its exchange rate, including global commodity prices, inflation rates, and interest rate differentials.
When the dollar strengthens, the rand usually weakens and vice versa, but in a world where the dollar is weakening, the rand is expected to benefit along with other currencies, said Cassim. However, he also pointed out that the US economy is still performing strongly, and the market has rapidly priced in an extra half a percentage point of US Federal Reserve interest rate hikes. This has weakened the rand from around R17 per dollar in January 2023 to over R18 to the dollar recently.
Additionally, Cassim mentioned that local interest rates in South Africa are well below those in some peer economies, such as Brazil, Mexico, and Hungary. The country’s repurchase rate is at 7.25%, and the prime lending rate is at 10.75%. Investec’s chief economist Annabel Bishop suggested that the comparatively low-interest rates in South Africa, combined with high inflation, have reduced real returns, making investors look elsewhere.
The risk premium associated with the rand has also been reduced due to slower rate hikes compared to the US. Furthermore, domestic factors have not helped the rand’s situation, such as declining growth expectations due to continual load shedding, which Cassim said has mostly been negative for the rand.
On Wednesday, the rand ended 1.6% lower against the US dollar, ignoring a smaller-than-expected drop in local retail sales earlier this year. Stats SA revealed that retail sales fell 0.8% year on year in January, following a revised 0.5% fall in December.
The currency dropped significantly on March 15 after the US banking crisis spread to Europe and affected global markets. According to Reuters, the US’ blue-chip Top 40 and its broader all-share indexes fell around 3%, the lowest they have been this year. This followed a major global investment banking company Credit Suisse announcing that it was unable to increase its stake due to regulatory issues surrounding the size of its holding.
Recent data has also shown ongoing weakness in Africa’s most industrialised economy after a bigger-than-forecast fall in the fourth-quarter gross domestic product. Cassim stated that the central bank is expecting growth rates of 0.3%, 0.7%, and 1.0% for the next three years, which is a ‘very disappointing outlook’. He added that these growth rates are “catastrophically low”, and coupled with a population growth rate of about 1.2% per year, living standards will continue to deteriorate as they have since 2014.
Domestic challenges, such as severe power constraints and political instability, have taken control of the rand and added to its volatility. According to the latest Stats SA data, the country’s economy has been considerably affected by load shedding, resulting in a seasonally adjusted contraction of 1.3% in Q4 2022.
This trend of load shedding is expected to continue into 2023, putting further strain on the economy and potentially impacting the rand’s value.
Moreover, political instability in the country is also a major concern for investors. The ongoing corruption trial of former President Jacob Zuma, along with rising tensions within the ruling African National Congress (ANC) party, have raised fears of further economic and political turmoil.
Overall, the rand’s outlook appears to be uncertain and subject to a range of economic and political factors both at home and abroad. As Cassim noted, the currency’s recent decline is worrying and could have significant implications for South Africa’s economy and its citizens’ living standards.
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