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In this episode of No Ordinary Wednesday, geopolitical own goals have pushed the rand to record lows against the dollar. Investec Treasury Economist Tertia Jacobs and Investec Head of Sales and Structuring Obakeng Pitse share their views on the outlook for the ZAR.
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In a discussion with Tertia Jacobs, Treasury Economist, and Obakeng Pitse, Head of Sales and Structuring at Investec Corporate and Institutional Banking, the underlying causes of the Rand's depreciation were closely analysed. The pair were speaking on the fortnightly podcast No Ordinary Wednesday.
Jacobs said the relationship between inflation and the Rand can either create a virtuous or vicious cycle. A depreciating currency can lead to higher inflation, which in turn reduces the currency's competitiveness. However, the recent interest rate hike by the Reserve Bank did not have the expected positive impact on the that usually follows a meaningful rate increase, she said.
The market reacted by selling off the currency, interpreting the Bank's warning about the risk of further currency weakness that could lead to higher inflation, as the SARB expects further currency weakness. This contradiction challenges the conventional wisdom that higher rates should support the Rand in the short term. This faded when the miscommunication was clarified.
Geopolitical own goals
There have also been several exogenous factors that have influenced the Rand's performance. Geopolitical crises and allegations of South Africa supplying arms to Moscow have rattled markets and investors, exacerbating the currency's decline.
The combination of weak economic fundamentals, such as elevated levels of load shedding and slower growth, along with increased political risk, has led to an elevated country risk premium. This, in turn, has driven investors and traders to exit the Rand and government bond yields, as the fiscal position could deteriorate after two years of revenue windfalls.
We’re caught in a trap
While South Africa managed to avoid a technical recession in Q1, with the economy returning to pre-Covid size, Jacobs maintained the country is caught in a low-growth trap. The GDP growth forecast for the year remains low at 0.2%.
Positive signs in certain sectors, such as mining, manufacturing, and construction, provide some relief but are not expected to lead to a significant currency revaluation. The focus she said now shifts to load shedding in winter and upcoming events, including the possibility of President Putin attendance at the BRICS summit in August, and the next Reserve Bank meeting, which will shape the outlook for the second quarter. This week the possibility has been flagged of the summit moving to elsewhere, i.e. China, which is not a member of the ICC
Monetary policy can’t go it alone
Pitse emphasised the detrimental impact of ongoing load shedding and rising interest rates on the Rand: “The persistent electricity crisis and structural concerns weigh heavily on investor sentiment. Monetary policy alone cannot rescue the currency, as the country needs long-term structural decisions to restore investor confidence. Capital flows and equities have already been affected, and the volatility in the market poses challenges for the Rand's recovery.”
Investors lose appetite for SA bonds
The pair also spoke about foreign ownership of South African government bonds which has reached record-low level and highlighting the lack of international confidence in the country.
As foreigners become net sellers or refrain from buying bonds, the Rand faces further downward pressure, as the current account on the balance of payments could turn into a deficit in 2023. The sub-investment grade rating from all three major rating agencies contributes to the difficulties in attracting and retaining capital flows.
Bumpy road ahead
Looking ahead, Pitse anticipated continued difficulties in attracting capital flows and retaining investor interest. Rising interest rates and foreign ownership trends suggest ongoing challenges for the Rand.
Jacobs agreed, noting that South Africa's specific factors, along with the unexpected pace of developed market interest rate hikes, have magnified scrutiny on emerging markets.
The country's ability to address fiscal risks, contain spending, and provide solutions for the electricity crisis will be crucial in determining the Rand's future trajectory.
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