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Is the weak rand the result of the ongoing load shedding?
Many South Africans are pondering this question, as the currency is hovering near multi-year lows, depreciating to its weakest level against the US dollar since late 2020, trading at around R16.70/$.
At the same time South Africa is experiencing its worst load-shedding on record since last week. The consecutive days of stage 6 load-shedding is way beyond the magnitude of rolling blackouts implemented in the past, when stage 6 was implemented for only one day in 2019.
According to the Bureau for Economic Research (BER) at Stellenbosch University, loadshedding also results in foregone (non-energy) fixed investment.
“This is near impossible to estimate in monetary terms and depends on your assumptions about the counterfactual reality without the electricity constraint.”
The BER says in addition to further depressing already subdued South African business and consumer confidence, the move to stage 6 also soured foreign investor sentiment towards the country, and likely contributed to the slide in the Rand/Dollar exchange rate.
The rand lost about 4% week-on-week against the US dollar, closing weaker than R16/$ on four consecutive days last week.
Local woes, however, are not fully to blame for the weakness as the greenback saw broad-based strength last week, although the Rand did underperform compared to its peers, the BER says.
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Prof. Jannie Rossouw, visiting professor at the Wits Business School, says it is not only loadshedding that is affecting the Rand, but also the loss in investment due to loadshedding.
“We also have a government that is in a state of disaster. It is falling apart and people are moving their capital out of the country as markets weaken,” he said.
Although we would all like to blame the weak performance of the Rand in this current “cost of living crisis” on Eskom’s stage 6 loadshedding, Bianca Botes, director at Citadel Global, says it is not that simple, and loadshedding is merely a small contributor due to global events.
It is true that loadshedding negatively affects economic growth and sentiment, but the weak performance of the Rand stems from numerous factors and therefore it will not automatically improve when Eskom simply switches the lights back on, she says.
The global environment, risk of recession, investors looking for safe havens and flocking to a strong dollar all contribute to the weakness of the Rand. Botes says the global environment is the key contributor to the weak Rand, which is affected by geo-political events such as the Russia-Ukraine war, as well as international inflation and interest rate hikes.
“Central banks around the world are looking to rein in inflation to prevent the significant economic damage that comes with long-term higher levels of inflation, and therefore interest rates are watched closely.”
ALSO READ: SA economy well on its way to ‘technical recession’
She says the risk of recession is based on history that shows that a recession is almost always preceded by a period of tightening monetary policy, such as rising interest rates and fiscal contraction with less government spending, higher taxes, or both, and often higher energy prices.
“The increasing risk of a recession is dampening appetite for risk assets, such as the Rand and other emerging market currencies and assets denominated in these currencies.”
Investors are flocking to “safe havens” during times of low sentiment, high risk and economic uncertainty, Botes explains. “Gold, usually considered to be a ‘safe haven’ asset, is not as attractive to investors due to the surge in interest rates and high yields offered by United States (US) treasuries.”
Investors appear to be flocking to the strong dollar as a “safe haven” asset of choice, as it surged to a 20 year high against the euro.
“Emerging market currencies, including the Rand, will therefore feel the pinch of the rising dollar: the stronger the dollar, the more Rands are required to buy a dollar.”
ALSO READ: Stage 6 load shedding costs R4 billion a day, possible credit downgrade
This means that businesses have to adapt and Botes says they should now consider a good, comprehensive cash management strategy to ensure their company’s cash earns more interest than it would by simply sitting in a business’ current account, where interest is typically close to zero.
“Just as your business is unique and adaptable, your cash needs should be too. Seek out a partner who will create a bespoke cash management solution specific to your business’ ongoing needs. Use this time of volatility and rising interest rates to leverage cash management strategies to the benefit of your business,” she says.
Economic research group, Oxford Economics Africa, says the Rand has weakened gripped by intense loadshedding and heightened global risk aversion.
“Broad US dollar strength and growing concerns about an economic slowdown are weighing on risk sentiment. We expect the Rand to come under further pressure in the second half of 2022 and our revised currency forecast sees the Rand ending the year at R16.78/$, averaging R15.95/$ for 2022 as a whole.”
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