The rand plummeted yesterday in light of the US ambassador accusing South Africa of supplying weapons to Russia to aid in its war with Ukraine.
This news saw the rand fall to a new low of R19.34 to the US dollar, and it continued to be under pressure on Friday.
The South African currency weakened 0.8% to 19.36 per dollar by 09:04 in Johannesburg, breaching the all-time low of 19.35 set during the Covid-19 lockdown in April 2020.
Chief economist at Stanlib Asset Management, Kevin Lings, said the speed at which the currency was weakening suggested “there was something in the background” and these recent allegations from the US could explain the currency’s depreciation.
He told The Money Show that this news would have led to a lot of concern that the US may retaliate by sanctioning or cutting off South Africa’s preferential access to the US market.
“This news could help to explain how much the rand has underperformed relative to emerging markets,” he said.
While other emerging markets have seen currency gains, the rand has only weakened, despite the substantial interest rate hikes by the South African Reserve Bank (SARB).
“There’s no doubt that we’ve been generally a weak emerging market currency and that the Russia issue is exacerbating that weakness.”
A recession looms
The Russia allegations have prompted the RMB to predict that South Africa will face a recession in 2023. It expects the country’s GDP to contract by 0.8%.
While GDP growth predictions for South Africa have generally been low, most experts’ expectations were positive.
However, RMB adjusted its predictions in light of the continued high stages of load-shedding and the news about South Africa’s alleged involvement with Russia.
Lings said continued stage 6 load-shedding is of particular concern to GDP growth.
The SARB said earlier this year that stage six takes out more than R800 million worth of GDP daily, and South Africa has had around 37 days of stage 6 load-shedding this year.
“There’s no doubt that that has pushed us to the point where we are in a recession, and if I look at the performance of most of the economic sectors, it’s broadly weak, and there’s nothing in the pipeline that’s going to improve that,” said Lings.
The rand’s weakness and South Africa’s perpetually sticky inflation will likely force the SARB to implement another interest rate hike and prolong the current hiking cycle.
The country’s inflation has become increasingly difficult to manage due to external effects such as load-shedding and other economic pressures.
Despite this high inflation, South Africa is also seeing muted growth, pointing to the likelihood of a recession.
How a weak rand affects the individual
The impact of a weak currency will fall largely on lower-income individuals, as higher-income individuals have often externalised some of their wealth and are, therefore, likely to benefit from the rand’s weakness.
The effect will come through directly imported inflation. In recent years, South Africa has become increasingly import-intensive – including an increasingly larger share of the food sector.
Therefore, many goods in stores will have to be repriced to account for the weaker currency. The petrol price is also likely to come under renewed pressure.
This will, in turn, keep inflation elevated, forcing the SARB to extend the hiking cycle, which will affect anyone with credit.
He said all of these factors will make the cost of living less affordable and have a knock-on effect on every facet of the economy.