Global Courant
Despite falling below the key resistance level of R18 against the dollar on Friday (June 16), the rand has bounced back to levels above that point and remains frustratingly resistant to a move in a firmer direction.
According to Annabel Bishop, Investec’s chief economist, the local unit has been buoyed by a softer dollar in recent sessions, but concerns about South Africa’s proximity to Russia are raging and keeping investors at bay.
Bishop noted that the main driver behind the stronger rand is US dollar weakness, which has come about as global sentiment improves. Markets are more at risk as falling inflation in key markets continues, raising expectations that rate hike cycles are nearing their end – coupled with expectations that interest rate cuts may even follow in the near future.
Also contributing to improved global financial market sentiment, which tends to strengthen emerging market currencies like the rand, was commentary from the Institute of International Finance (IIF) last week that highlighted a soft landing for the US economy ,” Bishop said.
“The IIF – the global association of the financial sector – said in particular that the US should avoid a recession, but also indicated ‘positive prospects for capital flows to emerging markets’, while the IIF also sees ‘a favorable inflation picture’. ”
While there are risks, the IIF has a dovish view on near-term inflation, Bishop said.
Edge under pressure
However, despite the more positive outlook around the world, the situation in South Africa remains one of stress, largely due to ‘idiosyncratic’ domestic problems.
These include:
The current electricity crisis; Problems with transportation and transnet, affecting growth and state revenue; South Africa’s (alleged) ties to Russia through the West.
While load shedding has been suspended for most of the day for the past two weeks, the country is far from overcoming its energy crisis, with energy availability and generation capacity still worse off than they were in 2022.
Industries, meanwhile, bemoan the deteriorating state of the country’s roads, which is affecting freight and transportation, adding to the many logistics, rail and port capacity problems.
Above all this, however, looms geopolitical risk, Bishop noted.
The IIF’s analysis of South Africa highlighted its ties to Russia and possible sanctions as a key risk – a position that has been echoed time and time again in various reports on the country’s growth prospects.
With regard to South Africa, the IIF notes, “the direction of near-term non-resident capital flows will depend on whether the West imposes sanctions on South Africa, whose external financing needs are expected to rise in line with the wider growing current account deficit.
The IIF warned that investors “will remain extremely sensitive to developments in South Africa’s relations with Russia” and that findings about South Africa’s ties with Russia represent the main near-term risk.
“Western sanctions would lead to a sharp sell-off of South African assets, increase external financing risks and lead to possible rating downgrades,” the report said.
Damage control
South Africa and the government are oblivious to these risks, with President Cyril Ramaphosa last week doing damage control to try and bolster the country’s “neutral” position vis-à-vis Russia.
The president’s charm offensive has paid off and helped push the rand up from nearly R20 to the dollar in late May/early June. Ramaphosa led a delegation of African leaders to Russia and Ukraine over the weekend and called for an end to the war.
Despite the PR show, big questions still linger over South Africa’s ties to the invading nation. As far as perception is concerned, the Western world seems unconvinced.
An investigation into allegations that South Africa supplied arms to Russia during a covert overnight visit by a Russian ship in December 2022 is still ongoing. The results will not be made public. At the same time, South Africa will still host BRICS leaders, including Russian President Vladimir Putin, for a summit in August.
Putin has an arrest warrant from the International Criminal Court (ICC), to which South Africa is a party. The country will be obliged to arrest him when he lands in the country. Attempts to avoid this obligation have proved unsuccessful.
There is plenty of speculation that South Africa wants to move the summit to another country to avoid having to arrest or virtually attend Putin, but as it stands now, the summit is going ahead as planned.
These questions and fears are still very much present in the market, preventing the edge from gaining ground.
Read: Ramaphosa calls for peace – Russia threatens grain supply
