Global Courant 2023-05-10 19:36:46
The Rand plunged to a three-year low this Wednesday (May 10) as fears of more winter tax losses mounted.
Reuters reported that Eskom told parliament on Tuesday that there would be a 45-day delay in returning a generator online.
“The delay is likely to put more strain on the grid during the winter, when the load is already over 10 hours a day in most parts of the country,” he said.
On May 10, the rand was trading at R18.78/USD, having reached its weakest level since early May 2020 at R18.8325 earlier in the day.
The day before the low point (May 9), the currency had fallen by 1.7%.
Kieran Siney, co-head of financial markets at ETM Analytics, said that the rand, in addition to domestic bonds, is underperforming compared to other emerging markets.
“Until there is a concrete plan to solve the South African energy crisis that the market digs into, the underperformance will continue despite the attractive yields on offer and the deep undervaluation of the ZAR.”
ETM Analytics said the bad sentiment reflected by the media prompted investors to question the country’s stability as a result of the tax shedding; however, nothing out of the ordinary happened to mirror the fall in the value of the rand.
By the end of May 9, the average South African had blacked out for a total of 34.56 days in 2023, matching the previous record set in 2022.
Researchers, analysts and politicians are all pointing to the severity and frequency of progressive blackouts as the country’s colder temperatures only get worse.
With a colder climate, demand for electricity peaks while supply is limited by unit maintenance, sabotage, corruption, a lack of alternative energy producers and general mismanagement.
This is because the South African Reserve Bank (SARB) is focusing on the issue of higher inflation and peripheral depreciation in the country — two factors likely to lead to another rate hike this month, said Annabel Bishop, chief economist at Investec.
According to Bishop, the governor of the Reserve Bank, Lesetja Kganyago has pointed to the spill-over effect of peripheral weakness on higher inflation in South Africa, noting in particular, “as the dollar has strengthened, the inflationary impact of currency depreciation has resurfaced. ..”
“This limits the benefits of slowing global inflation to domestic inflation. The SARB has revised its inflation forecasts upwards – headline inflation is now expected to decelerate at a slower pace, averaging 6.0% in 2023 (5.4% earlier).”
The economist said foreign investors have sold a total of $11.4 billion worth of South African bonds so far this year, and this has further negatively impacted the rand.
South Africa’s “real return” on interest rates is low and relatively unattractive to investors, adding to the rand’s weakness, Bishop said.
The governor of SARB has further warned that: “higher fuel and food price inflation is a direct result of a more depreciated exchange rate. Domestic food price inflation continues to rise despite the normalization of global agricultural commodity prices.
“If corporate and household expectations for future inflation deviate from the inflation target, higher nominal wages and consumer prices are likely to emerge.” “This implies that we must continue the normalization of interest rates”.
“As inflation rises and growth slows, a central bank that fails to respond to rising prices will face the prospect of increasing inflationary shocks. Currencies are depreciating and investments are falling.”
Bishop said the central bank could surprise again with another 50 basis point hike on May 25, but South Africa’s rate hikes (4.75% if raised by 50 basis points this month) would still be lower than that of the US, the one with a full 5.00% in the current cycle of rate hikes.
“The MPC meeting in May may be the last at which the SARB could deliver a larger (50 bps) increase, with South African GDP statistics also due in early June, likely to show that Q1.23 is contracted by the harsh divestiture regime, and other deteriorating factors of production,” Bishop said.
The rand is currently traded at:
R18.63/$ R20.44/€ R23.51/£
Read: Reserve Bank tightens its tools for interest rates in South Africa
