On 13 February, the rand breached the $18-level again, recording its weakest level since mid-November. This decline follows hot on the heels of the annual State of the Nation Address (Sona), delivered by Pres. Cyril Ramaphosa on 9 February.
The Sona was predictably met with mixed reaction, with the stand-out feature being the declaration of the energy crisis as a national state of disaster. According to Business Unity South Africa, the background to the Sona was actually multiple crises, covering energy, logistics, criminality, water provision and governance.
Judging by capital market reaction, the Sona was not well received, with the rand finding itself in the dubious position of second worst performer against the US dollar since the beginning of 2023. Of all the currencies of note, only the Argentine peso, which remains in freefall, has lost more ground against the US dollar than the South African rand over the past six weeks.
Fortunately for importers, however, the rand strengthened more or less in line with most other emerging market currencies on Valentine’s Day, when January’s US inflation data was published. Although the rate of increase in the annualised CPI only declined marginally from 6.5% to 6.4%, it was enough to confirm the downward trajectory of US inflation since peaking at 9.1% in June 2022 and convince the capital markets that hawkish monetary policy was nearing its end.
US nearing full employment
The unemployment rate in the US is at a 50-year low and more than half a million jobs were added in January. Despite wage growth having declined, the tight labour market may prompt the US Federal Reserve to raise the federal funds rate again. Most commentators nevertheless expect the next rate rise to be limited to 25 basis points.
The reaction to the US inflation data was fairly muted and, for now, a measure of calm reigns, with no clear indication of any major shift toward a risk-on sentiment amongst global fund managers.
Rand weakness did not kick in immediately after the Sona, however. During January, Eskom and the SA Reserve Bank conspired to knock the rand. Electricity blackouts have become more regular and severe in South Africa, due to a combination of inadequate investment in renewable energy and a decade of maintenance neglect at several power stations.
Eskom’s problems with attempting to keep the lights on have been exacerbated by acts of vandalism, sabotage, theft and corruption, which ultimately necessitated the assistance of military personnel to protect certain power stations.
Reserve Bank pessimism
A second reason for the rand bucking the trend of most other currencies during January was the SA Reserve Bank’s downgrading of South Africa’s economic growth forecast for 2023 from 1.1% to 0.3%. The bank also cut growth expectations for 2024 to 0.7%, down from its earlier forecast of 1.4%. The IMF is more bullish about South Africa’s growth prospects, with a forecast of 1%.
Fortunately for the rand’s prospects over the medium term, South Africa’s 10-year government bond yield has declined since December 2022. Although it picked up 30 basis points since the Sona, it remains 110 basis points below the level of 1 December last year – a clear sign of renewed investor appetite for the country’s bonds.
As for the US dollar, the greenback has recently lost substantial ground to virtually all of the currencies of the advanced economies and emerging markets. One of the reasons for the dollar’s current weakness is that it remains overvalued in terms of its real effective exchange rate (REER). With the International Monetary Fund having become more bullish over global growth prospects in 2023, including a belief that the US will escape a recession, the dollar is bound to remain under pressure.