South Africa scores another major own-goal for the rand

 ·4 Dec 2023

Global financial market sentiment is risk-on, and the global market for metals has picked up, creating a favourable market for emerging market currencies.

However, this is for emerging market currencies except for the rand, which continues to be hamstrung by load shedding and troubles with state-owned enterprises – like a R47 billion government guarantee for Transnet.

This is according to Investec chief economist Annabel Bishop’s latest Rand note for the first week of December 2023.

After reaching R18.97/USD last week on Thursday, the rand subsided to close at R18.66/USD on Friday and has remained around this rate, experiencing more stability last week but still at risk of international market sentiment, she said.

Analysing the favourable environment for emerging markets (EMs), Bishop noted that Global financial market sentiment has been largely risk-on and the US dollar has weakened, but the rand’s weakness is due largely to domestic issues currently as it misses out on the increased risk-taking appetite globally.

“The rand remains at the bottom of the EM currency ranked by Bloomberg, with the majority having strengthened on the year out of the twenty-two currencies. The rand is also missing out on the improvement in metals’ prices,” she said.

Bishop added that continued and recently elevated load shedding, as well as the National Treasury’s latest SOE lifeline, has also dented the rand’s potential.

“Load shedding remains a bind on growth and investor sentiment, as does Transnet’s enormous and worsening logistical problems over 2023, which has also negatively affected state revenues and foreign investor sentiment into markets,” she said.

She added that the financially-strapped SOE has received a R47 billion extension of government guarantees, allowing it to issue more favourably priced debt, which will likely be utilised to raise more debt to pay off existing obligations, which are shortly falling due.

“This will add to negative investor sentiment, increasing the financial obligations of the state as the credit rating agencies essentially rate the SA government debt as including all the SOE debt it guarantees.

“In turn, this raises the supply of debt, and unsurprisingly, it has halted the downward momentum in SA’s benchmark (10-year) bond, eradicating the positive sentiment stemming from global financial markets as well,” she said.

Bishop noted that in the US, the core PCE deflator came out as expected last week, at 3.5% y/y for October, aiding US dollar weakness as risk aversion faded further, although the rand failed to gain substantially from this, as other EM currencies have.

“Foreigners dumped R3.4 billion worth of SA bonds on Friday (1 December), a sizeable amount. For the week as a whole, R8.2 billion was sold net of purchases,” she said.

The rand remains around R18.65/USD, prevented from marked strengthening by fundamental weaknesses.

Read: Stage 6 load shedding gut punches South Africa

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