South African markets yesterday staged a recovery after falling to a three-months low as risk-off aversion returned ahead of US consumer inflation (CPI) figures, and amid heightened global tension.
The rand yesterday lost more than 1% during early morning trade and breached the psychological R18 mark to the US dollar, amid a stronger greenback and deteriorating outlook for South Africa’s economy caused by the ongoing power crisis.
This was the lowest the rand had been since early November, 2022 losing ground on both global and South African-specific issues.
However, the rand managed to shake off most of the loses by the close of the JSE, only losing 0.3% and dipping back to R17.91 to the greenback by 5pm.
Geopolitical concerns heightened as the US reportedly shot down a flying object near the Canadian border over the weekend – its the fourth unidentified flying object shot down by the US in a month.
The US dollar, meanwhile, was hovering near a five-week high as investors increased their bets for prolonged monetary tightening by the US Federal Reserve.
US Federal Reserve chair Jerome Powell recently warned that returning inflation to its target would take “quite a bit of time”, and that the recent strong employment data showed why the bank thought this will be a process that takes quite a bit of time.
TreasuryONE currency strategist André Cilliers said the rand had remained the worst-performing emerging markets’ currency this year on the back of the ongoing power crisis, along with the current global risk aversion.
“Markets will remain cautious ahead of tomorrow’s crucial US CPI number, with a strong number likely to see the dollar gain further and put more pressure on currencies like the rand,” Cilliers said.
“Investors are hoping for clarity on the government’s plans for Eskom, which were announced in the president’s Sona, and when the finance minister delivers his budget speech next week,” he said.
Sustained power cuts enforced by the state-owned power utility Eskom to curb a grid collapse, continued to plague businesses and undermine economic growth while also fuelling inflation.
Eskom recently stated that rolling blackouts would likely persist for at least two more years as it overhauls its ageing, mostly coal-fired plants.
As a result, President Cyril Ramaphosa last week announced a national state of disaster of the energy crisis in a bid to fast-track the government’s processes aimed at throwing more resources to address the crisis.
According to South African Reserve Bank (Sarb) estimates, the electricity crisis costs the country as much as a crippling R899 million per day.
The central bank last month reduced its annual economic growth forecast for 2023 to 0.3% from 1.1%, with Sarb Governor Lesetja Kganyago saying power disruptions would shave two percentage points off output growth.
This forecast economic downturn and weakening activity due to insufficient electricity supply has been weighing heavily on the rand, above and beyond the global factors.
Investec chief economist Annabel Bishop said the rand continued to depreciate on rising political risk, along with deteriorating fundamentals.
“Business sentiment is depressed, damaged also by weakening economic productive capacity as rail and port transport capacity deteriorates, along with waning security of water supply, and the Reserve Bank revising its GDP growth forecast to close to zero,” Bishop said.
“The tempering of market optimism for a very rapid drop in core inflationary pressures has seen the rand weaken since the start of the month and with a negative carry trade, while foreigners remain net sellers of South African portfolio assets,” she said.
Meanwhile, the All-Share index was nearly 1% higher at around 79 770 points following Friday’s decline, mainly supported by tech stocks and industrials.
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