Rand against the Ropes

The rand breached the R19/$ level today, hit by a toxic cocktail of load shedding and a deepening economic crisis, as well as interest rate concerns.

The Rand last traded at these levels during the height of pandemic-related market panic in April 2020, and may now be on a march to break through its worst level ever (R19.26/$).

Aggressive hikes in interest rates have also hurt the economy. While the Reserve Bank has insisted that this should help to tame inflation, the reality is also that South African interest rates need to remain competitive to protect the rand.

Investors are used to South Africa offering much higher interest rates than developed markets like the US, but following aggressive US rate hikes, that differential between the US and local rates has now shrunk, and South African rates are not that attractive anymore – which is compounded with the increased risk about the country’s economic outlook.

The rand’s latest battering comes amid growing fears that the power crisis is set to worsen, with talk of a grid collapse and a total blackout becoming more frequent among the chattering classes. South African media is rife with references to a ‘total blackout’ – a total collapse of the national energy grid. This anxiety is also reflected in the rand exchange rate, with the South African unit being one of the worst-performing emerging market currencies so far this year. There is simply no confidence left on this front, which is not a solid foundation for a currency.

On top of that, government’s support for Russia isn’t exactly helping the Rand. Pick n Pay chair Gareth Ackerman has become the latest business leader to lambast the government over its ties with Russia, warning the ANC’s support of the Eurasian military power threatened a trade agreement that allows SA exports to enter the US duty-free.

South African officials allowed a cargo plane targeted by U.S. sanctions for supporting Russia’s military efforts to land at an air force base near the capital, Pretoria, last week, a move that could further increase tensions with the United States. U.S. officials previously said the plane has been known to ship weapons for Russia’s defense forces.

The rand weakness could worsen South Africa’s worrying inflation situation, as imports like fuel will keep prices high. Food inflation currently stands at a 14-year high of 14.0%.

All of this has left the Reserve Bank in an impossible situation: interest rate hikes are harming a stricken economy, but it also has to fight inflation and protect the rand’s appeal.

In March of this year, the SARB implemented its ninth consecutive interest rate hike in this hiking cycle to bring inflation within its target range. The repo rate currently stands at a decade-long high of 7.75%. And we can expect another 25 to 50 basis points increase on the 25th of May.

The rand was trading at R20.77 to the euro and R23.91 to the pound at midday today.

So what can you do? Firstly, get rid of your debt. Prepare for another interest rate hike this month. Watch your spending. SAVE. For the rand to stabilise, a clear implementation plan is needed to solve the electricity crisis and logistical problems, and evidence that it is being put into action, so that the economy can grow and create jobs.

Stay Savvy,

Jacques

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