Turning the Diplomatic Tide
President Cyril Ramaphosa’s strategic efforts to dissociate South Africa from perceived alliances with Russia are starting to yield results, bringing a reprieve for the beleaguered rand, as the focus shifts towards the world market trends over local tribulations like persistent load-shedding.
The cloud of uncertainty over the potential grid collapse and apprehensions regarding South Africa’s speculated ties with Russia, which could have drawn Western sanctions, have been gradually fading. Consequently, investors and international markets have ceased their punitive measures against the rand.
In the past few weeks, concerns about sanctions — no matter how improbable — led the rand to a high of R19.92 to the dollar, stemming from perceptions of South Africa’s alignment with Russia amidst its ongoing conflict with Ukraine, despite claims of neutrality.
Additionally, the local currency was under strain due to speculations over Russian President Vladimir Putin’s possible attendance at the BRICS summit, scheduled for August in South Africa.
The International Criminal Court’s arrest warrant for Putin for alleged war crimes put South Africa in a challenging situation, as being a party to the court, it would be obliged to enforce it.
However, the pressure seems to be easing. Rumours of Putin likely missing the summit and Ramaphosa’s explicit call for an end to the war have helped the country solidify its neutrality stance, allowing the rand to settle below R19 to the dollar, currently trading at R18.50.
While the rand was inching towards R18, it has since reversed course, losing some ground.
Rand Riding Global Waves
Investec’s chief economist, Annabel Bishop, notes that while the rand isn’t particularly robust, it is presently being shaped by international market movements rather than local crises.
“The rand is likely to remain volatile, influenced by global events more heavily currently, as lower load shedding stages and President Ramaphosa’s recent efforts to strike a more neutral balance in global geopolitics have been overshadowed,” she said.
According to Bishop, global factors contributing to a weaker rand include risk-averse sentiments that particularly impact volatile emerging markets like South Africa.
She observed that markets remain on edge due to cryptic signals from the US, especially surrounding the Fed’s plan to persist with rate hikes. Additionally, geopolitical risks emanating from the Russia-Ukraine conflict and uncertainty around a potential recession continue to cast a shadow.
“The heightened uncertainty has also added to a more risk-off environment,” Bishop stated. As an emerging market and commodity currency, the rand is adversely affected by growing uncertainties in global financial markets, she added.
Domestic Concerns Still Matter
Yet, local issues have not entirely faded from the market’s radar.
Concerns linger that South Africa may witness weak economic growth this year – if not a recession – and the investment sentiment has not shifted significantly enough to benefit the local markets, Bishop noted.
“Markets also worry about the government’s increased appetite for nationalisation in the healthcare sector and on expropriation without compensation, reducing foreign appetite for investment in equities and bond, on worries over the health of future state finances and economic growth,” she added.
Despite the rand’s recent upward swing, Investec’s outlook for the currency remains cautiously pessimistic in the short-term, with expectations of it averaging above R18 to the dollar for the year.