George Glynos, head of research at ETM analytics, warned that the rand could weaken to levels much lower than R20 to the US dollar.
This warning comes after the South African Reserve Bank (SARB) added sanctions by the United States as a new risk in its new Financial Stability Review (FSR).
The SARB said South Africa’s desire to remain politically neutral may not be perceived as such, potentially resulting in secondary sanctions imposed by the US.
“South Africa’s non-aligned stance in the war between Russia and Ukraine is increasingly being questioned,” the FSR report said.
The South African financial system will not function if it cannot make international payments in US dollars.
The diplomatic fallout resulting from the comments by the US Ambassador to South Africa on 11 May 2023 led to a sharp sell-off in the rand.
It reached its worst-ever level against the US dollar, trading at R19.51 to the US dollar on Friday, 12 May. It continued to weaken and reached a new low of R19.87/USD on Tuesday, 30 May.
Glynos told ENCA they take the warning from the Reserve Bank very seriously, adding that he does not understand the government’s position on this issue.
“The inescapable fact, unfortunately, is that we are at the mercy of what this government chooses to do,” he said.
He said none of the government’s actions since the beginning of the year has assisted the local currency “in any way whatsoever”.
“We can put the bulk of the rand weakness down to government inaction, maladministration, and an inability to manage the economy properly,” he said.
To make matters worse, South Africa is playing chicken with the Western world regarding Russia.
“South Africa is taking a position which is the polar opposite of what our major trading partners would like to see,” he said.
It is disturbing as additional pressure on the already struggling economy can have dire consequences for the country and its currency.
“South Africa is already reeling from load-shedding, failing SOEs, an underperforming economy, greylisting, and portfolio outflows,” Glynos said.
“If we add sanctions, you could only imagine the implications for the rand. We could be talking about levels substantially higher than R20 to the US dollar.”
Risk of hosting Russian President Vladimir Putin
South Africa is set to host Russian President Vladimir Putin at the BRICS summit set to be held in Cape Town in August.
South Africa said it would provide diplomatic immunity to attendees of two meetings of officials from the BRICS group of countries.
Putin, whom South Africa invited to attend the August gathering, is wanted by the International Criminal Court on charges related to Russia’s war with Ukraine.
As a signatory to the Rome Statute, which established the court, South Africa would be obliged to arrest him if he attended.
Glynos said it would be incredibly dangerous for South Africa’s economy to host Putin and not arrest him as the law requires.
“The situation is already charged because of what happened in Simonstown and what did, or didn’t, get loaded on the Lady R ship,” he said.
Relations with the US are already strained, and the rest of the Western world is not far behind.
“South Africa risks becoming a pariah state. It is definitely not what we need right now,” Glynos said.
“The situation is a very sensitive one and the further we go down this road, the more dangerous it becomes.”
“I can assure you nobody wants to see a rand trading at R21, R22, or even lower against the US dollar.”
The weak rand imposes an enormous cost on the economy and will plunge the country into a deep recession.