South Africa at risk of serious economic hardship

South Africa’s pro-Russia stance risks tremendous economic hardship as its relationship with the United States and other big trading partners sour.

Yesterday, the rand plummeted after the US ambassador to South Africa, Reuben Brigety, accused the country of supplying weapons to Russia.

“The arming of Russia by South Africa with the vessel that landed in Simon’s Town is fundamentally unacceptable,” Brigety said.

“We are confident weapons were loaded onto that vessel, and I would bet my life on the accuracy of that assertion.”

He said that given this event, the deviation from South Africa’s policy of non-alignment with Russia regarding the Ukraine war is inexplicable.

South Africa’s Presidency described the comments as “disappointing,” adding that no evidence had been produced to back that up.

South Africa and the United States had agreed on an independent investigation into the matter.

The rand slumped to its weakest level on record against the US Dollar as a diplomatic row between South Africa and the US simmered.

South Africa’s preferential access to United States markets under a two-decade-old trade agreement is worth billions but is now at risk.

“The political stakes are high, with trade deals and market access all now in question,” economists at Rand Merchant Bank wrote in a client note.

“This will add an additional layer of risk until the debate around this has cleared, and the rand should reflect that risk premium.”

The South African currency weakened 0.8% to 19.36 per dollar by 9:04 a.m. in Johannesburg, breaching the all-time low of 19.35 set during the Covid-19 lockdown in April 2020.

Yields on benchmark government bonds due 2032 rose 12 basis points to 11.72%, adding to Thursday’s 34-point jump.

The ambassador’s claim came with the rand already under pressure because ongoing energy shortages undermine the economy.

Investors are also asking questions about President Cyril Ramaphosa’s grip on his administration, with many business leaders calling him indecisive and weak.

The currency has now plunged 5% since Monday, heading for its biggest weekly decline in a year.

The cost of hedging against rand declines in the options market has soared the most since March 2020.

Reporting with Bloomberg.