Power, politics keep rand on the slide

The rand is back to being one of the world’s worst-performing currencies in 2008 after a brief respite last year, and there appears nothing, for now, to halt its slide.

A chronic energy crisis that is likely to slice into economic growth, political uncertainty and a gaping current-account deficit paint a gloomy picture for a currency prone to doses of sharp volatility.

Just four years ago the rand was an emerging-market darling, but a combination of inflation, growth and political risks have tarnished it.

“We have seen a significant amount of rotation from South Africa; there has been a significant outflow of funds,” George Glynos of independent market analysts ETM said.

The currency was trading at about 7,78 against the dollar by 1.15pm on Thursday, adding another percent to this year’s losses and putting it in sight of eight to the dollar — a mark last seen in mid-2003.


It is more than 11% weaker on a trade-weighed basis in 2008, having lost 12% to the dollar and euro to 15-month and six-year lows respectively.

The slide began in November as global risk aversion gathered pace, but has accelerated this year, driven by local factors. It has tumbled almost 20% since November 7, when it touched a then 17-and-a-half month high.

This cannot be blamed on emerging-market sentiment, with peer currencies suffering nowhere near the pain the rand has endured.

Turkey’s lira is just 2% down for the year, while the Australian dollar, a fellow commodity-based unit also supported by high interest rates, is stronger.

Only the Kenyan shilling has suffered as badly, and that has been pummelled by a disputed election and riots that have claimed more than a thousand lives.

“It is mostly localised issues that are at play … electricity, growth and political uncertainty,” Glynos said.

“Until we get some feeling that things are going to get better, people will think twice about exposing themselves to South Africa. Levels over eight will probably look more attractive to foreigners.”

Investors have shown their displeasure by dumping stocks.

Non-residents sold off a net R4,2-billion in shares last week, adding to the R5,3-billion discarded the week before, cutting crucial funding for a huge current-account deficit of 8,1% of GDP.

‘In the dark’

Power problems are casting a gloomy shadow over the economy.

Electricity utility Eskom is struggling to meet fast-growing demand and ageing infrastructure is collapsing under the strain.

Production at mines, a key employer and source of foreign currency, came to a halt late last month after the state-owned utility said it could not guarantee supply.

The crisis has rippled through markets, igniting the platinum price to a new record high and propping up the price of gold as mining heavyweight AngloGold warned of lower output.

South Africa produces about two-thirds of the world’s platinum and is a major producer of gold.

Local businesses have also been forced to shut doors and households have been left in the dark, while traffic gridlocks blackened streets.

Eskom and the government have no quickfire solution and have asked consumers to cut back on usage as they spend R300-billion over the next five years to upgrade facilities.

The energy problems are widely expected to cut growth, adding to pressure on Africa’s biggest economy already feeling the pinch from 400 basis points in rate hikes since June 2006.

The risk to growth was highlighted last week when the central bank chose to leave their repo rate at 11%, despite inflation racing above its 3% to 6% band.

The rand briefly slipped more than 2% shortly after the announcement on the dilution of a leading attraction for the currency — an expanding rates differential.

“ZAR [the rand] will likely remain undermined by local power shortages and receding rate-hike expectations. [Dollar-rand] broke important resistance levels of 7,60 and 7,39 over the last week,” said foreign-exchange strategists at Bank of America, adding the next test was 7,98.

Investors are also worried about political change after Jacob Zuma — a populist backed by left-wing trade unionists — replaced President Thabo Mbeki as ruling African National Congress leader.

Mbeki’s lame-duck status until elections in 2009 and graft charges laid against Zuma leave the political landscape open to divisive change.

Analysts say the rand may well gain, or hold its own, in the short term but there is little to stop a broader momentum to slide.

“It [the fall] may be running out of short-term momentum, but in the medium term the trend is more weakness,” a Johannesburg-based trader at a foreign bank said.

“Within the next week or two it should be at eight [to the dollar].” — Reuters

The M&G Online budget special report is brought to you by the

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories

Institutions of higher learning should commemorate their casualties

The bust of Matikweni Nkuna at Tshwane University of Technology is an example of how we should honour those who fought for equal access to education

Seals abort pups in mass die-off

There are a number of factors — a pollutant, virus or bacteria or malnutrition — that may have caused the 12 000 deaths on Namibia’s coast.

Deconstructing South Africa’s construction industry performance

The construction industry has contracted sharply, partly due to Covid, and needs to rebalance its focus if it wants to survive

Editorial: SA will be bankrupted by looters

The chickens have finally come home to roost: if we do not end the looting, it will end us

Zuma vs Ramaphosa? Neither is the leader South Africans deserve

Neither statesman could command sufficient authority in an ANC that remains mired in corruption and infighting and at the behest of big capital

E-payments for the unbanked are booming

The pandemic is providing mobile phone network operators with a unique chance to partner with fintech firms and banks to deliver clever e-commerce solutions to the informal sector in Africa
Advertising

Subscribers only

Free State branches gun for Ace

Parts of the provincial ANC will target their former premier, Magashule, and the Free State PEC in a rolling mass action campaign

SAA bailout raises more questions

As the government continues to grapple with the troubles facing the airline, it would do well to keep on eye on the impending Denel implosion

More top stories

Hawks swoop down with more arrests in R1.4-billion corruption blitz

The spate of arrests for corruption continues apace in Gauteng and the Eastern Cape.

Catholic NGO boss accused of racism and abuse in Sudan

The aid worker allegedly called his security guard a ‘slave’

Agrizzi too ill to be treated at Bara?

The alleged crook’s “health emergency” — if that is what it is — shows up the flaws, either in our health system or in our leadership as a whole

SANDF hid R200m expenditure on ‘Covid’ drug it can’t use

Military health officials are puzzled by the defence department importing a drug that has not been approved for treating coronavirus symptoms from Cuba
Advertising

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday