Global Courant 2023-05-25 16:48:54
The rand continued to be under pressure Thursday (May 25) ahead of the South African Reserve Bank’s (SARB) Monetary Policy Committee’s (MPS) announcement on interest rates.
The Reserve Bank will announce its decision on interest rate hikes in the country at 3 p.m., with markets expecting a hefty 50 basis point hike. However, some economists see room for a lower increase of 25 basis points given better-than-expected inflation data released on Wednesday.
The rand was trading above R19.30 per dollar during afternoon trading and markets are awaiting the decision.
According to Annabel Bishop, Investec’s chief economist, foreign investor sentiment towards South Africa remains extraordinarily negative – something that helped push the rand to an all-time low of R19.52 per dollar last week.
Sentiment is driven by the ongoing electricity supply crisis, with frequent warnings of phase 8 shutdowns in the coming months.
This is compounded by a serious lack of plan or progress being made to boost electricity supply this year, Bishop said.
However, markets are also being driven by external factors, she noted, adding that recession concerns in the United States and China approaching a fiscal cliff amid a weak recovery are also contributing to risk-averse sentiment.
Bishop noted that a rate hike of 25 or 50 basis points on Thursday should help the rand, but said an even bigger hike — 75 basis points or more — would be needed to return some stability to the currency.
“While we expect a 50 bps increase, higher interest rates are weakening the economy, along with significant power and water divestment capacity and very weak rail and port capacity, all of which are negative for the rand and the likelihood of the’ lite down case’. ‘ to get up.”
The economist outlined several scenarios for the South African economy and where the rand would go. Each scenario comes with a probability percentage, which indicates how likely it is that each scenario will play out.
As it stands, the best results for South Africa are extremely unlikely with a probability of around 1%. The likelihood of a downside scenario occurring, meanwhile, is nearly on par with what Investec sees as the baseline for the country (42% versus 46%, respectively).
Worryingly, the worst-case scenario has a probability score of 10% associated with it, indicating that the economy is much more likely to get worse than better. However, that doesn’t mean there isn’t hope.
“Looking ahead, interest rates are expected to fall in South Africa next year, if not as early as Q4.23, while inflation is likely to be lower in the second half of this year compared to the first half, falling into 2024 .” said Bishop.
“Economic growth, likely to be stagnant this year, is expected to increase successively at a faster pace in the coming years as renewable energy increasingly replaces Eskom’s declining production and contributes to the growth of fixed asset investment.”
Here’s where the rand could go, based on Investec’s scenarios:
Extreme advantage
Probability: 1% Edge movement: average R16.60 at the end of Q2, ending at R15.50 Conditions: Strong economic growth (3% to 5% in 2023 and then 5% to 7% in 2024) Good governance Growth- creating reforms Strong property rights No nationalization or expropriation without compensation High business confidence and investment growth Substantial FDI Fiscal consolidation Subdued domestic inflation Favorable weather conditions Strong global growth Risk-on sentiment Commodity boom Rapid credit rating upgrades to investment grade Short greylisting Rapid transition from fossil fuels to renewables
Upside down
Probability: 1% Edge movement: averages around R17.20 at the end of the second quarter, rising to R17.00 at the end of the year Conditions: Economic growth rises to 5.0% yoy Increasing business confidence and investment Structural constraints lifted Strong global growth Risk-on sentiment No nationalization or expropriation without compensation Low domestic inflation Increased privatization Credit rating upgrades through fiscal consolidation Significantly lower borrowings Substantial transition from fossil fuels to renewable energy Greylist for less than 18 months
Baseline
Probability: 46% Edge Movement: Averaged 17.95 at the end of Q2, heading to R17.20 at the end of the year. Conditions: Economic growth rises to 3.0% on an annual basis Market sentiment neutral to positive Rand stabilizes Inflation influenced by weather conditions, especially food prices Slowly moving away from fossil fuels Modest easing of climate change War Russia/Ukraine easing Little to no expropriation without compensation Temporary greylisting
Lite disadvantage
Probability: 42% Edge Movement: Averaged R18.90 by the end of the second quarter, heading for R19.00 by the end of the year. Conditions: Same international environment as the base scenario Interrupted confidence of domestic entrepreneurs Significant electricity and water outages Very weak rail capacity Civil and political unrest Low investment growth Turn to leftist policy Recession Temporary increase in government borrowings Risk of credit rating downgrades, occurring later Expropriation of private sector ownership, but very limited High inflation in adverse weather conditions Little transition to renewable energy sources
Serious drawback
Probability: 10% Edge movement: average R19.30 by end of Q2, on track to R20.00 by end of year Conditions: Prolonged global recession Global financial crisis ANC/EFF coalition in 2024 Widespread, severe load shedding services Severe civil and political unrest Government borrowing from broader sources SA downgrades credit rating to B, and eventually CCC Failed to switch to renewable energy Insufficient measures to combat climate change Very high inflation in very adverse weather conditions Full implementation of expropriation without compensation SA state on blacklist
Read: The rim’s nosedive over the past decade
