On 20 April R18 bought one US dollar, R22.51 bought a pound and R19.78 bought a Euro…
Today you need R19.30 to buy a dollar, R23.90 to buy a pound and R20.79 to buy one Euro. In less than a month the rand has lost around 5% ground to major currencies, and in the past year it lost almost 20% of its value.
So, what’s behind this huge downtrend in the rand?
Three reasons for the sudden weakening of the South African rand
Reason #1 – Loadshedding and a weak local economy
The world economy isn’t in a great spot right now as the post covid recovery hits some bumps because of ‘too accommodative monetary policy’ catching up with us.
That said, the South African economy is dealing with 6 to 12 hours a day without electricity. Vodacom recently noted, on a bad day up to a third of its network is offline because of a lack of electricity.
The severity of load shedding this year has surprised even me – and I have been very critical of Eskom in the past.
This is now catching up with the SA economy. Businesses simply can’t keep going without electricity to keep operations going.
Whilst businesses all over are in the process of mitigation strategies, installing record amounts of solar panels and backup generation, it simply cannot replace the baseload power Eskom is supposed to provide. It’ll probably take two to five years for the problem to be solved by the private sector. In the meantime, the SA economy will have an extra stone around its neck – and this will weigh on the rand.
Reason #2 – Russia, weapons and the US
A US diplomat has claimed South Africa supplied the Russians with weapons – despite our government claiming neutrality in the war.
This sparked fears that if the SA government alienates the US enough, our benefits under AGOA might be lost. AGOA is the African Growth Opportunities Act and it allows South Africa (and other African countries) duty free exports to the US.
South Africa trades around R300 billion with the US, and only R9 billion with Russia…
So obviously if South Africa were to lose the trade benefit it could seriously hurt our economy. At this stage I think this was an overreaction.
That said – South Africa’s ANC definitely does not seem to be neutral in the war between Russia and Ukraine. And if our government is picking sides – it should remember who our biggest trade partners are, and what it would mean losing their goodwill.
Reason #3 – S&P Global Ratings is reviewing SA’s credit rating
S&P will issue its review of South Africa’s credit rating on Friday 19 May.
In March the agency downgraded SA’s outlook from BB-/B ‘positive’ to ‘stable’. It cited electricity shortages as a risk to the economy, and possible reason for concern.
Chances are it could downgrade the outlook to negative. Or even take us down a further notch into junk status.
Other reports claim that despite SA’s grey listing, sufficient reforms have been made to ensure our country’s credit rating will not be further downgraded.
2022 saw tax revenue in SA improve – which is also a positive indicator for ratings agencies.
I suspect ratings agencies will keep our ratings unchanged. But market jitters about a potential downgrade amidst severe loadshedding could be a contributing factor for the sudden weakness in the rand.
I have been on the record calling R20/US$ – and I still think the rand will continue weakening further. But this latest drop in the rand’s value is probably overdone in the short term and we should see some bounce back unless one of these three reasons I’ve discussed above moves in a negative direction even more. Rand hedge stocks – and specifically companies with operations offshore are definitely the way to go at this stage.
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