Efficient Group chief economist Dawie Roodt has warned that South Africans are in for some “really, really difficult times” following the US ambassador’s accusation that South Africa supplied weapons to Russia.
On 11 May, US ambassador to South Africa, Reuben Brigety, publicly accused South Africa of supplying arms to Russia to aid in its war against Ukraine.
He alleged that the armaments were collected by a Russian ship that docked at the Simon’s Town naval base in Cape Town in December.
This news brought fears of retribution in the form of a US sanction, which saw the already-weak rand tumble in response.
While Finance Minister Enoch Godongwana has assured South Africans that the US will not impose sanctions, the country may still feel the effects of this news.
Roodt told BizNews TV that this accusation would affect the country’s currency, inflation, interest rates, economy and global reputation.
However, he thinks some of these effects will be short-lived, and the chances of a US sanction are low.
The rand plummeted when news of the ambassador’s accusation broke, falling to a new low of R19.34 to the US dollar. Since then, the rand has not traded below R19/USD.
The rand had been weak and trading below fair value for months. It had hit its lowest level since April 2020 a day before the news broke.
Many economists argue that the currency should be trading at around R16.50 to the dollar – a value it has not come close to since mid-January.
However, Roodt explained that this is always the case with the rand.
“The South African currency is always weaker than what theory at least suggests,” he said. “The rand is fundamentally a weak currency.”
He attributes this to the nature of the South African economy due to factors like South Africa’s high inflation rate compared to countries like the US.
“The rand is weak – it’s always weak – but today, it is much weaker than usual.”
This is attributable to more recent economic developments, like increased load-shedding, muted economic growth and political instability. The US ambassador’s allegation is the most recent reason for the rand’s sudden weakness.
However, Roodt is confident that the rand will bounce back from the knock it took last week.
“What is interesting about the South African currency is, whenever there’s some sort of crisis or a negative thing happening, then you see a sudden weakness in the currency,” he said.
“And then, after a while, the dust seems to settle a little bit, and the rand gradually drifts a little bit stronger to a slightly better level. I think that is what we’re going to see again.”
He expects the rand to appreciate and settle at around R18.50/USD, which is still below fair value.
However, he added that a weak currency is not necessarily a negative attribute, as it makes South African assets cheaper and, therefore, more attractive.
A problem only arises when sentiment about the country, which affects the rand, stays negative over the long term.
“In the short term, sentiment plays a very important role and sentiment at the moment is very much negative,” he said. “And the unfortunate thing about sentiment is that the sentiment pushes the rand to unrealistically weak levels. If it stays there for too long, then that becomes the actual, correct level.”
He added that, at the moment, sentiment is certainly against South Africa.
Another problem that results from a weak currency is inflation.
Inflation and interest
Roodt said the rand essentially serves as South Africa’s share price, which means South Africans are currently poorer.
A weak currency has an inflationary effect, which means the rand’s recent drop could push the South African Reserve Bank (SARB) to increase the country’s repo rate and extend the hiking cycle.
South Africa has been in a hiking cycle since November 2021. Experts predicted a 25 basis point hike at the next Monetary Policy Committee meeting at the end of May and, following that, hoped for an end to the cycle.
However, the rand’s weakness and its inflationary effects may see the SARB hike the repo rate by 50 basis points, further muting the country’s economic growth.
The recent allegation from the US ambassador has sparked fears that the US will now exclude South Africa from the African Growth and Opportunity Act (AGOA), a United States Trade Act.
This legislation aims to assist the sub-Saharan African economies and improve economic relations between the US and these African countries.
Roodt said South Africa being excluded from AGOA would negatively impact South Africa.
The US is one of South Africa’s largest trading partners. The country’s total trade with the US is more than R400 billion.
South Africa is running a trade surplus with the US, and exclusion from AGOA would, therefore, affect South Africa more than it would the US.
“We’re going to be the big losers here, but it doesn’t mean we’re going to stop trading with Americans,” he said.
South Africa will have to continue trading with the US, but it will be far more expensive and complicated, which will be felt by the economy.
“Although the impact is not necessarily going to be that large on the South African economy, every time we shoot ourselves in the foot, it is bad for the economy.”