I have for some time been arguing that the stagflationary and adverse balance of payments effects of load-shedding, in the context of an already difficult global backdrop, would be negative for the rand and monetary policy. This is exactly what is playing out in our economy now, and it’s not a pretty sight.
Pronouncements by policymakers, including the electricity minister, that load-shedding would intensify into winter undermined the case for an already struggling currency. Add to that the diplomatic spat between the SA and US governments over possible arms sales to Russia, and the currency continued to slide. The rand has depreciated 11% relative to the dollar and underperformed all other major currencies apart from the Argentinian peso in 2023 to date.
I wish I could say it was over, but the currency remains vulnerable. Many argue that the rand is at a record low across a range of metrics, and it is. For what it’s worth, the only currency ranked below the rand in cheapness on the Bloomberg Big Mac index is the Russian rouble. However, valuations are not enough to support the currency into what is coming. It will probably continue to slide as global growth concerns rise and financial conditions tighten.
Global slowdowns are always accompanied by tightening financial conditions, a strong dollar and weaker emerging market currencies. If we are correct and we are going into one, there is nothing to suggest that this time will be different. The only reasonable expectation is for the rand to weaken even further.
After all, overreaction from the currency in the context of a global sell-off is the rule, not the exception. The rand is already trading at a never-before-seen R19/$, but it could trade above R21/$ in the short term. Such a move is likely to be temporary. Even so, it would still be jarring to the national psyche, and terrible for overseas holiday plans.
As I expected, the Reserve Bank now finds itself in the difficult position of trying to explain why it is raising rates in a dead economy. With respect to recent moves in the currency, the bank has no choice. In the current environment central banks, especially those of troubled emerging markets skating on the edge of sustainability, are closely watched. SA is a troubled emerging market with questionable sustainability.
I remember when SA was downgraded below investment grade. At the time Bank governor Lesetja Kganyago was at pains to explain that the downgrade would put SA in a class of investment destination where investment flows are more volatile — and, I would have added, markets less forgiving. This is exactly where SA is now.
Unlike in 2008, turbulence in global markets and domestic policy errors now lead to acute pressure on financial flows. We saw this play out in 2020 and this past month. If the Bank failed to hike, it would risk extending perceived credibility erosion to the central bank and risk the rand coming under even more severe pressure than what I outlined above.
In this context, the Bank might worry about growth, but would have to hike anyway to maintain policy and anchor inflation expectations, borrowing costs and the rand. Some might argue that a weak economy would benefit from a weaker currency. This would only work if we did not have load-shedding. Right now a weaker currency is just inflationary.
The last acutely rand-negative “own goal” scored by SA was the so-called Nenegate in December 2015, when then president Jacob Zuma fired then finance minister Nhlanhla Nene. The rand skidded deep into undervalued territory and was eventually supported by domestic rate hikes and a softening US Federal Reserve (Fed).
As we did then, we need these two factors in play now to create a floor under the currency. The Bank is expected to raise rates by 50-75 basis points later this week, and a Fed pause could be confirmed at the next federal open market committee meeting in June, and start easing by the end of this year. These meetings will be critical for the rand in the next few months.
• Lijane is global markets strategist at Standard Bank CIB.
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