Global Courant 2023-05-15 13:02:28
Although the international financial market is largely the driving force behind fringe movements, idiosyncratic domestic developments hurt more than expected, says the Bureau for Economic Research (BER).
In their latest weekly review, BER economists said that while it is difficult to pinpoint the exact reasons for currency movements, heightened concerns about the domestic energy crisis, including concerns that it could worsen in the coming months, have seriously contributed to the recent currency loss. .
At the beginning of May, the country already suffered more outages than in 2022.
On Friday (May 12), the South African rand fell to its lowest level in recorded history at R19.47 per dollar. The BER said US allegations that South Africa was supplying arms to sanctioned Russia drove the already-pressed currency lower.
Perfect storm hits South Africa, sinking rand to worst level on record
The BER indicates that it is often the case that international developments take the cake when determining the peripheral trajectory. For example, we see the rand and other emerging market (EM) currencies weakening as the dollar strengthened on solid US data and changing interest rate expectations, rather than something that happened in South Africa, the BER said.
“Because of SA’s deep and liquid financial markets, the rand is also often seen as a measure of investor sentiment towards emerging markets in general,” said BER.
Despite this, other emerging currencies are not experiencing the same depreciation as the rand.
The missing rands are also pegged not only to the US dollar, but also to the pound and the euro. Over the past week, the rand has seen a 5% fall against the dollar and a 3.5% depreciation against the pound and a record low since 2016 for the euro.
BER said a further increase in local bond yields, resulting in lower prices, further confirms that the decline in investor sentiment is mainly driven by South Africa-specific factors rather than global or emerging market developments.
The yield on the 10-year Treasury bond closed Friday at 10.94%, currently about 100 basis points above the level seen at the same time last month, the economists said.
Concerns over higher stages of load shedding and a potential national blackout continue to be downward drivers of domestic currencies as they take their toll on investor sentiment.
More frequent and severe tax cuts could lead to a sharp contraction in South Africa’s GDP, scaring off investors.
The BER added that another reason for a weaker rand is that some key South African exports have seen their prices fall, with little chance of a reversal soon.
“This weighs on our terms of trade and foreign trade balance, with the current account deficit set to worsen significantly through 2023,” the group said.
The National Treasury has also delivered more bad news for the country’s economy, expecting South Africa to miss its primary budget surplus target for the fiscal year ending February 2023.
According to BER, this is mainly due to higher than expected VAT refunds. In addition, government payroll is expected to exceed the allocated budget for 2023/24, and revenues are under pressure from a sluggish economy and lower commodity prices, the group said.
As a result, financial ratios for this fiscal year are expected to be worse than initially anticipated in the February budget. These two shortfalls hurt the currency’s value, the BER said.
“A deteriorating trade, fiscal and real GDP outlook could negatively impact SA’s credit rating,” the group added.
Moreover, while not a new development, the Financial Action Task Force’s (FATF) greylisting of SA does not help sentiment towards the country.
At the same time, the relatively smaller interest rate differential between South Africa and “safe” advanced economies (due to the significant rise in interest rates in advanced economies) makes South African financial assets relatively less attractive, the group said.
The rand is currently traded at:
R19.10/$ R20.76/€ R23.79/£
Read: Load shedding pushes wealthy South Africans out the door
