By Helena Wasserman.
The rand breached the R19/$ level on Thursday, hit by a toxic cocktail of load shedding and a deepening economic crisis, as well as interest rate concerns.
The local currency 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/$).
The rand has lost 17% against the dollar over the last year.
“The rand is in a fragile state, with local factors, in particular load shedding, weighing on the local economy and currency. Rand weakness is expected to continue in the short term,” said Bianca Botes, director at Citadel Global.
Earlier this week, SA Reserve Bank governor Lesetja Kganyago warned in a speech at the University of Johannesburg that load shedding will reduce economic growth by 2% this year. The Reserve Bank economy now forecasts growth of 0.2% this year, and to average 1.0% in the following two years. “[This] is barely an expansion,” he noted.
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, which has made rand investments attractive and kept global money flowing to local markets, supporting the rand.
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.
Kganyago highlighted that the rand has been one of the worst-performing emerging market currencies over the past year.
“Idiosyncratic factors such as persistent load shedding and the recent greylisting of the country by the Financial Action Task Force have kept investors wary.”