Load-shedding hammers the rand

The rand weakened to its worst level in three years, and yields on local-currency bonds rose as South Africa’s continuing energy shortage and deteriorating economic outlook intensified concern among investors.

The currency of Africa’s most industrialized economy weakened as much as 1.1% on Wednesday to 18.8368 per dollar, the biggest loss among major emerging markets to the lowest since May 2020. MSCI’s gauge of emerging-market currencies was little changed on the day.

Rand-denominated government securities also sold off at the longer end. Yields on bonds maturing in 2048 climbed for a fifth day, the longest streak since August. At 12.2%, they are at their highest since March 2020.

Eskom has been implementing rolling blackouts since 2008 to reduce reliance on its ailing power plants.

Those outages have intensified in recent years, and the country has been subjected to 16 consecutive months of blackouts that can last as long as 12 hours a day.

Over the weekend, the company said it would indefinitely remove as much as 6,000 megawatts of capacity from the national grid.

Rand Shift

The rand had been stuck in a range of between 18 and 18.50 for about a month, then weakened after news that blackouts would remain at higher levels indefinitely.

The pound-rand cross has also shifted, with the pair touching its highest since January 2016 in intraday trade on Wednesday.

“I think there are several issues here. On the one hand, the power crisis and the associated load-shedding means the economy is at risk of stagnation with severe bottlenecks overall in infrastructure and through supply chains,” said Erik Meyersson, chief emerging-markets strategist at SEB AB in Stockholm.

“Add to this some recent sluggish high-frequency statistics, an acceleration in consumer price inflation, and investors will likely have cause to worry about the near-term economic prospects in South Africa,” Meyersson said.

Earlier this week, Treasury officials confirmed that a budget surplus was no longer on the cards for South Africa, predicting a miss of about $500 million after revenue collections fell short.

Traders in the options markets are beginning to position for further rand losses ahead of a US inflation report later on Wednesday. One-month risk reversals climbed a fourth day, the longest streak in two months.

“A shocker of a higher CPI number today in the US could start the makings of a 2007/2008 situation, so part of this move is people positioning ahead of the report,” said Warrick Butler, head of foreign exchange trading at Standard Bank, referring to the start of a global financial crisis.

Butler said that as one of the more liquid currencies in emerging markets, the rand is used as a proxy for risk.