Global Courant 2023-05-26 18:20:36
The rand is paying the price for South Africa’s woes, with the 20 per dollar level now firmly in sight as investors worry about restrictive monetary policies contributing to a deepening power crisis and political missteps to ease the already ailing economy. smother.
The currency plunged to a record low of R19.8468 per dollar on Thursday after the South African Reserve Bank raised its policy rate to a two-decade high.
That covered six straight weeks of losses for the rand in the face of unprecedented electricity shortages and a diplomatic spat with the US over South Africa’s ties to Russia. Option prices show an 80% chance that it will reach R20 within the next month.
The central bank said its restrictive policy stance was necessary to curb inflation, even though it warned more peripheral weakness was likely. But the move will put a strain on the economy, which is expected to grow by just 0.3% this year.
Falling commodity prices and a slowdown in growth in China, South Africa’s largest trading partner, are also weighing on output and prompting investors to exit the country’s equity and bond markets.
“The health of the local economy is the number one concern right now,” said Brendan McKenna, emerging markets strategist at Wells Fargo Securities in New York. “It’s difficult at this point to make a really compelling case for committing capital to South Africa and the rand.”
‘Turning point’
The rand offset some of its decline on Friday, rising about 1% against the dollar. But options pricing suggests more losses lie ahead. One-month risk reversals — the premium investors pay for options to sell the currency rather than those to buy — rose to the highest level since the start of the pandemic on Friday.
Governor Lesetja Kganyago said the central bank’s walking cycle will not reverse until the price growth trajectory changes and inflation begins to move towards 4.5%.
He placed much of the blame for rising prices on the government, which is responsible for high regulated and regulated prices, including electricity and water. Money markets are pricing in another 75 basis points of rate hikes by the end of the year, with the first policy easing not coming until May next year.
“While higher interest rates usually work to protect the value of the rand, there comes a tipping point where the effect of higher interest rates on GDP growth begins to negatively impact the currency,” said Kim Silberman, an economist at FirstRand Bank Ltd. , who expects the rand to remain under pressure even as the Federal Reserve begins to ease policy and the dollar weakens.
US allegations earlier this month that South Africa was supplying arms to Russia caused the rand to plummet more than 5% in four days as premium investors demanded to hold the country’s dollar bonds rather than US Treasury bonds to rise about 30 basis points.
South Africa is hosting the BRIC Summit in August, with Russian President Vladimir Putin on the invite list – another political risk event that could raise the edge.
‘More sensitivity’
“Markets may be more sensitive to any news given the recent geopolitical situation over South Africa’s stance on Russia and foreign policy non-alignment preferences,” said Erik Meyersson, chief emerging markets strategist at SEB AB in Stockholm.
The central bank said progressive power cuts — locally referred to as load shedding — would cut 2 percentage points of GDP growth this year as struggling state-owned electricity company Eskom Holdings SOC Ltd. fights outages at generating units. Plans to ease the utility’s debt burden and introduce more renewable energy into the grid are progressing at an icy pace.
Slowing growth would worsen South Africa’s fiscal outlook as tax revenues fall short of expectations. That would complicate the government’s efforts to consolidate the debt and reduce the budget deficit.
“The peak of negative developments means South Africa is likely to see negative, not just flat, growth this year,” Citigroup Inc. strategists Bhumika Gupta and Luis Costa wrote in a note, justifying an underweight position in the rand.
Read: South African ‘fundamentals’ drive investors away
