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The Rand has sunk to levels last seen during the initial days of the Covid-19 pandemic amid an elevated US Dollar and recent soft Chinese merchandise trade data, sitting at around R18.80 to the dollar and amplified that a national grid collapse is plausible.
According to economic research group, Oxford Economics Africa, confidence in South Africa is depressingly low at the moment and this is reflected in the Rand’s dismal performance.
“However, 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, have resulted in widespread downward revisions to South Africa’s growth forecast for this year. Oxford Economics Africa expects the economy to expand by a soft 0.6% in 2023.
Although a national grid collapse is a plausible scenario, it is a low-probability event with demand expected to increase in the winter months.
“This would deal a devastating blow to the ailing domestic economy, while the potential social unrest that is likely to ensue could prove dire for the country.”
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Businesses as well as consumers are heavily affected by the unrelenting power outages and the group says food price inflation continues to run hot, while the weak currency poses upside risks to the overall inflation outlook.
South Africa’s unemployment rate stands at 32.7% and it is worrying that the economy is producing jobless growth. In addition, economic growth has become extremely volatile in recent quarters, following an intensification in power outages since last year.
The group estimates that the economy grew by 0.5% q/q in the first quarter of 2023 and forecast GDP growth to come in at 0.6% this year, with risks firmly skewed to the downside.
“However, ultimately the ongoing power outages and broad infrastructure failures mean the South African economy is not in any position to produce meaningful economic growth, which could lead to potential credit rating downgrades down the line.”
South Africa’s Rand has been one of the worst-performing emerging market currencies so far this year and Oxford Economics Africa says the Rand exchange rate is very volatile in nature.
“From a domestic perspective, this volatility is driven by policy uncertainties, a fragile fiscal position in light of contingent liabilities related to Eskom and other state-owned enterprises (SOEs), weak credit ratings, and notable growth underperformance.”
The group also expect that the inflation differential with the US will tend to drive down the Rand against the Dollar in the long term, but in the short term it expects the local unit to remain volatile amid diminishing commodity prices and a firm US Dollar, with uncertainty compounded by concerns regarding global banking stress.
The Rand is forecast to average R18.1/$ in 2023 and remain around that level over the coming years, the group says.
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