The Rand plunged to a three-year low this Wednesday (10 May) as fears over increased load shedding during winter grew.

Reuters reported that Eskom told parliament on Tuesday that there would be a 45-day delay in returning a generating unit online.

“The delay is likely to add further pressure on the grid during winter when load shedding across most parts of the country is already more than 10 hours a day,” it said.

On 10 May, the rand was trading at R18.78/USD after hitting its weakest level since early May 2020 at R18.8325 earlier in the day.

The day before the lowest point (9 May), the currency had fallen by 1.7%.

Kieran Siney, the co-head of financial markets at ETM Analytics, said that the rand, alongside domestic bonds, is underperforming compared to other emerging markets.

“Until there is a concrete plan to resolve South Africa’s energy crisis that the market buys into, the underperformance will persist, notwithstanding the attractive yields on offer and deep undervaluation in the ZAR.”

ETM Analytics said poor sentiment echoed by the media drove investors to question the stability of the country as a result of load shedding; however, nothing out of the ordinary happened to reflect the decrease in the value of the rand.

By the end of 9 May, the average South African had endured an accumulated 34.56 days of blackout time for 2023 – matching the previous record set by 2022.

Researchers, analysts and politicians all point to the severity and frequency of rolling blackouts as only getting worse the colder temperatures become in the country.

With a colder climate, demand for electricity peaks while supply remains restricted due to units requiring maintenance, sabotage, corruption, a lack of alternative power producers and general mismanagement.

This comes as the South African Reserve Bank (SARB) focuses on the issue of higher inflation and rand depreciation in the country – two factors likely to result in another rate hike this month, said Annabel Bishop, the chief economist at Investec.

According to Bishop, the governor of the Reserve Bank, Lesetja Kganyago has highlighted the feed-through effect of rand weakness into higher inflation in South Africa, in particular noting, “as the dollar has strengthened, the inflationary impact of currency depreciation has resurfaced…”

“This limits the benefits of slowing global inflation to domestic inflation. The SARB has revised its inflation projections upwards – headline inflation is now forecast to decelerate at a slower rate, averaging 6.0% in 2023 (5.4% previously)”.

The economist said that foreign investors had sold a total of R11.4 billion in South African bonds for this year to date, and this has further had a negative effect on the rand.

South Africa’s ‘real return’ on interest rates is low and not attractive to investors comparatively, adding to the rand weakness, said Bishop.

SARB’s governor has further warned that: “higher fuel and food price inflation are a direct consequence of a more depreciated exchange rate. Domestic food price inflation continues to rise despite normalising global agricultural commodity prices.

“If the expectations that firms and households hold for future inflation stray from the inflation target, then higher nominal wages and consumer prices are likely to emerge.” “This implies that we need to continue the normalisation of interest rates”.

“As inflation rises and growth slows, a central bank that fails to respond to rising prices will face the prospect of compounding inflationary shocks. Currencies depreciate, and investment falls.”

Bishop said that the central bank could surprise again with another 50 basis point hike on 25th May, but this would still leave South Africa’s interest rate hikes (4.75% if it hikes this month by 50bp) below that of the US, which has hiked by a full 5.00% in the current rate hike cycle.

“The May MPC meeting may be the last one the SARB could deliver a larger (50bp) hike at, with South African GDP statistics also due out in early June, and likely to show Q1.23 contracted on the harsh load shedding regime, and other deteriorating factors of production,” Bishop said.

The rand is currently trading at:

  • R18.63/$
  • R20.44/€
  • R23.51/£

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