The rand is set to reach record lows in the coming months as global forces and domestic structural economic problems push the currency to continue its downward trend.
This was revealed in a note from HSBC analysts to clients this week, emphasising South Africa’s widening current account deficit as a reason for continued rand weakness.
The analysts said that despite the South African Reserve Bank’s (SARB) efforts to tame inflation and make the rand one of the most attractive emerging market currencies, this has not protected the currency.
In particular, South Africa is highly sensitive to external shocks due to how open its economy is, with 68% of its GDP coming from imports and exports and its recent poor economic growth.
However, internal issues such as the inconsistent electricity supply and inefficient logistics will exacerbate the effect of external shocks.
“We think global forces and domestic structural drivers are likely to dominate and push the currency to new record lows in the months ahead,” said the note.
The rand reached R18.83/$ on Thursday morning. It has weakened more than 11% this year, driven by load-shedding and the country’s deteriorating finances.
HSBC expects it to soften to R19.50/$ by the end of the year before weakening further to R20.50/$ as the government’s widening fiscal deficit worries investors.
“The new budget will be tabled on November 1 and should give more clarity on the government’s strategy,” the note said, referring to the medium-term budget policy statement.
“However, the fiscal equation is complicated with the elections next year, and unions prepared to strike if austerity measures are taken.”
The National Treasury has proposed drastic steps to rein in spending as the government has run out of money and faces a debt trap.
The measures include a freeze on new public service jobs, stopping procurement contracts for all infrastructure projects, and keeping public servant salary increases in check.
Considering the latest data about the state’s financial health, the Treasury’s position is unsurprising.
Last week, the National Treasury revealed that the budget moved to a deficit of R143.8 billion for July.
It is the largest deficit since 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.
Bloomberg reported that national debt has risen to R4.7 trillion and could reach R6 trillion in 2025, compared with R500 billion in 2006.
The situation has reached such concerning levels that South African Reserve Bank Governor Lesetja Kganyago said it was essential that the country reduced fiscal risks.
In June, the central bank expressed concern about a growing reluctance from local investors to continue absorbing government issuance.
Based on data compiled by Bloomberg, demand at a recent government bond auction was the lowest in nearly two years. Bidding was weakest for the longest-dated 2048 notes.
South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. The situation is set to become much worse as the country’s fiscal deficit this year will be around 6% of GDP.