Load Shedding Woes Contribute to South African Rand’s Unprecedented Decline

A combination of economic turbulence and concerns over interest rates drove the South African rand to plummet to a record low, falling to R19.8279/$ on Thursday night. This significant decline sees the currency having shed nearly 26% of its value over the last year. Recent developments, notably US allegations of South Africa arming Russia, have further exacerbated the situation, contributing to an 8% drop in the past fortnight.

The Ripple Effect of the Reserve Bank’s Decisions

This past Thursday saw the currency hit by another dramatic sell-off, in the wake of the South African Reserve Bank’s monetary policy committee meeting.

The anticipated repo rate increase of 50 basis points to 8.25% wasn’t enough to keep the currency from a sharp descent. Market analysts remain divided over the cause of the sudden decline.

The Governor’s Role

A group of experts attribute the slump to the perceived less hawkish stance of Reserve Bank Governor Lesetja Kganyago towards future rate hikes.

During the meeting, Kganyago expressed that while the bank had been moving towards tightening monetary policy, it had not yet arrived at “restrictive territory”. His comment that they had just reached this juncture and needed to evaluate the implications was interpreted as a subtle hint towards curbing further rate hikes.

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Normally, higher interest rates make rand assets more appealing to international investors. However, with other countries planning their own rate hikes, the relative appeal of the rand could be jeopardized.

Economic Fallout: The Alternative Theory

Contrarily, some analysts argue that the dramatic rand fall is the result of market trepidation over the potential economic consequences of another steep rate hike. With the country possibly facing a recession due to widespread load shedding, these concerns are far from unfounded.

“The rand’s strength usually improves following an interest rate hike. However, the currency’s poor response seems to suggest a potential policy error,” observed Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank, in an interview with Bloomberg. She added that concerns about fiscal stability amid grim growth prospects are starting to impact investors’ minds following the rate hike.

Investors in Wait-and-See Mode

The sentiments were echoed by Brendan McKenna, an emerging markets strategist at Wells Fargo Securities, who stated that the primary concern now is the health of the South African economy. “Given the commentary from the SARB, the underperformance [of the rand] is likely to persist. It’s difficult to mount a compelling case to invest in South Africa and the rand currently,” he opined.

Risky Forecasts and Potential Recoveries

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According to Bloomberg’s forecast model, based on rand options trading, there’s a higher than 50% likelihood of the rand crashing through the R20/$ barrier in the coming week.

Despite these daunting projections, Wayne McCurrie, FNB portfolio manager, cautioned against writing off the rand. “While this may sound implausible under current conditions, the medium-term outlook for the rand remains positive. The currency has consistently rebounded from record lows in the past, and we expect it to re-strengthen back to its fair value below R17/$,” he argued.

Unfortunately, for now, the weak rand will likely intensify inflation in South Africa, as the nation relies heavily on imports for most of its fuel and major crops like maize and wheat.

As of Friday morning, the rand was trading at R19.71/$, R24.34 to the pound, and R21.16 to the euro.