The Weak Rand Conundrum, Weekly News

The South African rand has tumbled to new lows against the US dollar and other major currencies this week, with the R20/$ resistance level in clear sight. The rand shed around 2% of its value yesterday as the South African Reserve Bank (SARB) announced a widely expected 50bps increase in the repo rate—a move that would usually bolster the currency.

There are two theories about why the rand has fallen. The first is that a dovish tone from SARB Governor, Lesetja Kganyago, has signalled to the markets that the current cycle of interest rate tightening is coming to an end. This is despite the fact that the interest rate differential between South Africa and the US is narrower than it was before central banks started increasing interest rates.

The second is that markets believe that the interest rate hike is counterproductive in the current economic climate. Given that the economy is faltering, higher interest rates will further dampen growth without strengthening the currency or taming inflation. SARB itself is aware of this danger. Following the unanimous decision from the Monetary Policy Committee to increase the interest rate, SARB warned that “given upside inflation risks, larger domestic and external financing needs, and load-shedding, further currency weakness appears likely”.

The conundrum is whether a sharply depreciated rand will be a boost to export-focused industries. Afterall, a weaker rand should normally promote sectors such as mining, manufacturing and agriculture, thereby also enhancing fiscal metrics. But this time is different due to South Africa’s infrastructural challenges.

With South Africa facing stage 4-6 load shedding for the foreseeable future—and a risk of stage 8 in the winter—companies in these sectors face serious constraints in production capacity as well as rising operational costs and increased finance charges. Railway and port bottlenecks, higher imported input costs and concerns about water supply only add to their woes. These infrastructural problems are also likely to have a negative effect on the tourism sector, which would otherwise benefit from the weak exchange rate in making the country a preferred destination for foreigners.

The SARB governor’s mandate is to focus on inflation, and the interest rate is the only tool he has to do so. But given the widespread failings of the state, the efficacy of this tool is limited, and South Africa faces the prospect of stagflation—with inflation fuelled by a weaker rand and growth crimped by high interest rates and capacity constraints.

Unless there is a concerted focus on addressing South Africa’s infrastructural collapse and implementing economic reforms, we can expect the rand to come under continued pressure as investors stay away from a volatile currency and markets price in low performance. Problems are likely to compound as weaker growth leads to a poorer tax take.

An interesting point is that our Investment Committee’s fair value models suggests that the rand is currently undervalued after falling nearly 16% for the year to date. We estimate the current discount to be around 13.65%, compared to 25% during the COVID crisis in April 2020 and 35% during ‘Nenegate’ in December 2015, which was compounded by “risk-off” towards emerging markets in general.

What makes things different this time is that rand weakness reflects a lack of confidence in South Africa-specific fundamentals rather than a rampant dollar or negative global sentiment towards emerging markets.. We are therefore struggling to see what the catalyst for a reversal of the South Africa-specific discount would be, given that these negatives are unlikely to be reversed soon.

In aggregate, +-85% of our clients’ assets have been either directly or indirectly externalised. Our bias towards offshore investing, for both political risk mitigation purposes as well as due to a vastly superior global opportunity set, has served our domestic investors well over many years and has come to the fore once again in 2023, with the MSCI World Index outperforming the JSE by approximately 22% year-to-date, as measured on a like-with-like basis.

“A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation “—-Ross Perot – American Business Magnate

Global News

There seems to be a potential resolution to the issue of the debt ceiling as Republican and White House negotiators move closer to an agreement to raise the debt limit and cap federal spending for two years, according to sources. Both parties have narrowed differences in talks over recent days, although details agreed to are tentative and they still have to reach final consensus as time starts to run out to avert a catastrophic US default.
Fitch placed the United States’ AAA credit rating on watch hours after a meeting ended on Wednesday. This is a sign of growing unease about the country’s ability to avert a first-ever default. Fitch expects a resolution to the debt limit before the 1 June so-called “X-date”. Moody’s has warned that even a brief default will result in a real risk to the creditworthiness of the government. The US received a credit downgrade during similar turmoil in 2011.
The US economy grew more than previously expected in the first quarter, gaining 1.3% versus the anticipated 1.1%. This was attributed to stronger than expected spending from consumers and from federal and local government. Consumer spending growth increased to 3.8% from 3.7% in the advance estimate.
Research sourced from London-based MRB Partners at our Investment Committee earlier this week, has a non-consensus view that the US economy will avoid a recession over the next year. “While economics momentum measures point to above-average recession risk, they do not capture structural factors that will provide important growth support. Consumer spending remains resilient, unemployment remains low, and housing and inventories are poised to boost GDP growth in Q2 after both being a considerable drag over the past year”. We thus anticipate that this will provide an underpin to US equities over the next 6 to 12 months.
Officials at the Fed are leaning toward pausing interest-rate increases when they meet next month, as there is heightened uncertainty over the economic outlook. However, they are not yet ready to end the battle against stubborn inflation. In minutes released on Wednesday, policymakers are uncertain about how much additional policy tightening might be needed and weighed the slower-than-expected progress on inflation and resilient labour market against the likelihood of a credit crunch following the recent banking turmoil.
One of the outcomes of the G7 summit in Japan, which ended on Sunday, was that the alliance, namely the US, Canada, Japan, the United Kingdom, France, Germany, and Italy, plus the European Union as a non-enumerated member, would support Ukraine. Sanctions against Russia will be tightened. Speaking after the meeting, Japan’s prime minister, Fumio Kishida emphasised the leaders’ determination to uphold the international rule of law “wherever in the world” there were unilateral attacks on sovereign states. The G7 nations also agreed on its first stand-alone document on the non-use of nuclear weapons and the affirmation that a nuclear war “cannot be won and must never be fought”.
The European Union’s economic stronghold, Germany, has suffered its first recession since the start of pandemic. This has quashed hopes that Europe’s top economy could escape such a fate after the war in Ukraine sent energy prices soaring. First-quarter output shrank 0.3% from the previous three months following a 0.5% drop between October and December. Its initial estimate last month was for stagnation. Much of the lack of growth is due to the reluctance of consumers to spend on items such as food and beverages, clothing, and footwear, and on furnishings.
The UK’s inflation rate has dropped from being in the double digits in April, snapping a seven-month run. However, this is still the third month in a row that price pressures have been stronger than feared. The year-on-year increase in the Consumer Prices Index fell to 8.7% in April from 10.1% the previous month. This was the biggest percentage point drop in the annual inflation rate in more than 30 years. However, the continued high rate could increase market expectations that the Bank of England will extend its cycle of interest-rate hikes through the summer to stamp out price pressures.
Before the war with Russia, almost a third of Ukraine’s energy consumption came from coal. However, the Russian attacks have rendered coal plants inoperable, which will mean phasing out fossil fuels as a power source. Rather than fixing the plants, Ukraine is building a green and materially decentralised reconstruction through renewable energy, which is essential to its economic recovery and national security. This endeavour comes ahead of the nation’s 2040 target, with renewables and nuclear power to each take 50% of the source. The question is whether this will result in a new, global trend, as the UN’s Net Zero target of 2050 draws closer.
Apple has signed a multi-billion-dollar deal with chipmaker US Broadcom to use more of its parts in Apple’s iconic devices. The agreement means that components for 5G devices will be designed and made in the States. The deal is part of a plan Apple announced in 2021 to invest $430 billion in the US economy. Its timing comes as a trade row centred on the technology industry intensifies between Washington and Beijing. The long-running dispute has seen the US impose a series of measures against China’s chip making industry and invest billions of dollars to boost America’s semiconductor sector.
The world’s most valuable chipmaker, Nvidia Corp, expects sales to be way more than past analysts estimates, showing how booming demand for artificial intelligence processors has the potential to reshape the sector and setting shares up to hit a record high. Sales in the three months ending July will be about $11 billion. This shattered an average analyst estimate of $7.18 billion. Shares rose about 24% on Thursday, which also helped lift stocks of other chipmakers and AI-related companies.
Facebook’s owner, Meta, has been given a record 1.2 billion euro fine by Ireland’s Data Protection Commissioner because of how it has handled user information. It has five months to stop transferring users’ data to the United States. It is more than the previous record EU privacy fine of 746 million euros handed by Luxembourg to Amazon in 2021. Meta will appeal the ruling and seek a stay of the suspension orders through the courts. At the same time, job cuts at Meta could impact about 6,000 people as part of its “Year of Efficiency,” through which Meta is being massively restructured to save money and flatten the structure.
As at Thursday’s close the S&P was 1% down for the week.

Local News

The SA Reserve Bank raised interest rates by another 50 basis points (bps) to 8.25% on Thursday putting the rate at levels last seen in the aftermath of the 2007/08 global financial crisis. The rand weakened sharply on the announcement, falling from around R19.38/$ to R19.76/$, a decline of almost 2%.
Stanlib believes that, given the South African Reserve Bank’s perspective, more currency weakness appears likely. “Unfortunately, sentiment (foreign and domestic) towards South African has deteriorated noticeably further during 2023, aggravated by a range of factors including the persistence and severity of electricity outages, downward revisions to economic growth, uncertainty regarding allegations that South Africa recently supplied arms and ammunition to Russia, and a clear lack of effective political leadership. This significantly reduces the chances of sustained Rand strength in the short-term (and hence more imported inflation) – even if interest rates are increased further.”
Anthony Butler, a regular columnist for BusinessLIVE and a lecturer in public policy at the University of Cape Town, states that things in South Africa can get worse quickly. He says there is an unavoidable accumulation of institutions and organisations that just don’t work. And the things that do not work cannot be fixed because other things are broken, such as the failure of Transnet to maintain railways, which means trucks are forced to take to the roads, destroying them. There are, he says, three realities: The idea that the governing party can reform itself is no longer credible, the party will not easily be removed through the ballot box, and, even if the ANC loses power, democracy turns on the idea that a fresh coalition can form a new government and steer the machinery of the state in a different direction.
Eskom has secured parliamentary approval for its R254 billion bailout after Parliament passed the Eskom Debt Relief Bill on Thursday. The Eskom Debt Relief Bill is the second quarter-trillion -rand bailout for the troubled state power utility, four years after the 2019 National Budget provided R230 billion in a mix of a once-off allocation and annual instalments over 10 years. In our view, with an increasing debtor’s book and alleged ongoing corruption within this SOE, we see little evidence that this will be the last of the bailouts, despite the dramatic tariff increase of 18.5% by NERSA which becomes effective July.
Defence minister Thandi Modise stated on Wednesday that South Africa is willing to provide all necessary documents over the Lady R’s recent docking in Simon’s Town to an enquiry soon to be established by President Cyril Ramaphosa. South Africa, she said, only handled material that was ordered five years ago, without indicating what the material was.
Unions and businesses have said that attempts to get Transnet to sort out its ailing infrastructure, especially in the container corridor, have yielded minimum results. As a result, they are counting the cost of the rise in theft and vandalism on Transnet Freight Rail’s (TFR) line linking Gauteng and Durban, which, for the past week, has been operating at a quarter of its capacity. TFR has laid the blame on the escalation of theft and vandalism along the 740km-long container corridor for the 75% reduction in operating capacity over the past week, according to Bloomberg.
Miner Pan African Resources today told shareholders, in terms of its financial year to the end of June, that power outages will cost it production of about 10,000oz of gold. This drops its full year expected production by 11%. Pan African is rolling out renewable energy projects and reducing its dependency on Eskom. Its share price dropped 20% on the back of the loss of production news.
Coronation Fund Managers, which is still dealing with a R716 million tax dispute with the South African Revenue Service, believes the issue around interpretation of the tax laws affects all multinationals in South Africa as there is a need for clarity. The heart of the tax dispute, which dates to 2012, is whether profits of Coronation’s Irish subsidiary should have been included in the South African holdings company’s taxable income. Coronation has applied to the Constitutional Court for leave to appeal against a February Supreme Court of Appeal ruling that it is liable for tax payments stemming from those operations. The matter could take two years to be finalised.
Astral spent almost R750 million in the six months to March on alternative power sources, with its CEO, Chris Schutte, saying that government must respond to the business community’s concerns and the hardships “instead of sitting asleep at the wheel, floundering around decisions and not implementing real solutions while the country implodes”. Headline earnings per share decreased by 88% to 163c.
Richline, a jewellery manufacturer owned by billionaire investor Warren Buffett’s Berkshire Hathaway, is among three companies owed at least R15 million by Arthur Kaplan and NWJ jewellers. Each of them have, in their own capacity, applied to the high court in Johannesburg for the liquidation of Arthur Kaplan and NWJ jewellers’ holding company Luxe Holdings. Luxe will fight the liquidation cases in court. Luxe had been taken over by directors of Aurora Empowerment Systems, a company involved in the looting and mismanagement of the Pamodzi Grootvlei gold mine between 2009 and 2011.
Patrice Motsepe’s-backed Tyme has signed up two new international investors, Norrsken22, an Africa-focused tech growth fund, and Blue Earth Capital, an independent global impact investment firm, as part of its pre-series C capital raise launched in January 2023. It did not disclose the value of the deal, but total capital commitments attracted now are R1.5 billion. It will use the money to expand into key territories.
Embattled Nampak is getting ready for huge job cuts, salary freezes and a reduction in overtime as the result of a cash crunch that has eroded its share value over the past five years. At the same time, the company announced a reduced rights offer of up to R1 billion to help raise capital to pay off a R6 billion debt incurred after a disastrous expansion into Africa. Nampak’s debt far outweighs its R455 million market value. A prior R1.5 billion rights offer in January was not successful.
As at the time of writing, the rand is currently 0.75% weaker and the ALSI is 2.2% down for the week.