We have one person to thank for the lowest rand ever – economist

South Africans have one person to thank for the lowest Rand exchange rate ever: president Cyril Ramaphosa. The Rand’s misery started when he could not answer the question in parliament about what was unloaded from or loaded onto the Russian ship, the Lady R, in Simonstown last year.

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says the rest of the world lost confidence in South Africa and Ramaphosa’s ability to get the economy working again the minute the president could not answer this important question.

“It is only Ramaphosa’s fault and it will cause South Africans a lot of suffering. Everything we import will become more expensive, including fuel and a higher fuel price will of course lead to higher food and transport prices, which are the two biggest contributors to rising inflation.

“Rising inflation will cause the Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) to increase the repo rate even more,” he warns.

The falling Rand fell even further and faster just after the Sarb increased the repo rate by another 50 basis points, hitting a new low of R19,84. On Monday afternoon it was trading at R19,64.

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The role of the repo rate increase

The Bureau for Economic Research (BER) at Stellenbosch University says the drop after the announcement of the repo rate increase seemed somewhat counterintuitive at face value, but some investors or traders expected an even bigger increase. Furthermore, markets seemed to have overreacted to comments in the Sarb statement accompanying the rate decision that ‘further Rand weakness’ was likely, the BER pointed out.

The MPC emphasised in an investor feedback session on Friday that this commentary was meant as a risk statement and not a baseline expectation that the Rand would weaken more. “In fact, the Sarb’s baseline projection is for the Rand to strengthen somewhat against the US dollar from its current weak levels.”

In addition, the BER says the MPC often mentions the Rand as one of the key upside risks to its inflation forecast. “The deterioration in the Sarb’s medium-term outlook for the current account may have also added to the downbeat sentiment towards the Rand.

“Strengthening ever so slightly against the euro and pound for the week, the Rand managed to claw back some of its losses against the greenback on Friday, but still ended 0.6% down compared to the previous week.”

The BER says the near-term trajectory of the Rand will remain an important factor for the Sarb’s next interest rate decision in July. The Rand was not the only emerging-market currency under pressure last week as the Turkish lira also weakened to a record low against the US dollar ahead of Sunday’s presidential run-off election.

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Was the repo rate increase too low?

The Nedbank Group Economic Unit says the Rand’s slide towards new lows continued during the past week, dipping to a new record low of R19.8376 against the US dollar on Thursday. “Some investors were disappointed with the decision to raise the policy rate by 50 basis points, instead expecting a larger 75 basis points hike.”

The markets were also rattled by the Sarb’s view that the Rand faced even more negativity in the months ahead. Apart from these pressures, the group says, general risk appetites remained patchy and fragile, with the US dollar regaining more lost ground over the past week on expectations that US policy rates would stay higher for longer.

Harry Scherzer, CEO at Future Forex explains that a depreciation in the Rand in the past was usually due to global risk aversion where investors would rather invest in a safe haven currency such as the dollar as opposed to a risky emerging currency like the Rand.

“However, recently the Rand has weakened even relative to other emerging currencies which suggests that it is the events within our borders that created this depreciation. Nobody will be too shocked to hear that those events included rolling blackouts and the general sentiment that the South African government is making decisions that are subpar and detrimental to the local economy.”

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The US ambassador’s statement

However, Scherzer says this was not enough to push the Rand to a new low. “It was the accusation by the US ambassador that South Africa sold arms to the Russian army which really put the nail in the coffin. And you would hope that a country on its knees with high crime, exceptionally high unemployment and an electricity grid on the verge of collapse would avoid placing itself on the unpopular side of globally contentious matters, which could result in sanctions if proven true.”

Unsurprisingly, the South African government vehemently denied these accusations and if they cannot be proven, the issue may fizzle and the Rand may actually recover over time. However, he says, investors are now spooked and will continue to exercise caution around South African investments, especially if government continues to make unwise decisions.

Scherzer warns that if it is proven, that South Africa did in fact sell arms to Russia, the Rand will likely weaken further and sanctions may follow thereafter. “On top of this, if South Africa continues to support Russia to the extent that it justifies sanctions from the West, or if rolling blackouts continue to worsen, we can expect to see the Rand weakening even further than its current levels.”

Economic research group, Oxford Economics Africa, says the Rand reflects the depressingly low confidence in and throughout South Africa. “That said, we believe that the most recent sell-off in the risk-sensitive Rand might be overdone and anticipate a correction in the near term. Idiosyncratic factors, primarily the persistent power outages deployed by Eskom in a bid to avoid a total collapse of the national grid, resulted in widespread downward revisions to South Africa’s growth forecast for this year. We expect the economy to expand by a soft 0.6% in 2023.”