Rand takes a hit as South Africa shoots itself in the foot

Were it not for the Government of National Unity’s (GNU) fallout over the past week, the rand would be substantially stronger following the United States’ tariff announcement.

Investec chief economist Annabel Bishop explained that the threat to the DA’s participation in the GNU has severely rattled financial markets. 

She said recent substantial US dollar weakness would see the rand below R18.00/USD, nearing R17.50/USD, but instead it’s above R19.00/USD on high political risk.

Bishop pointed out that the rand is currently the worst performer in the emerging market (EM) basket of currencies. 

Severely heightened political uncertainty has seen the local currency reach R19.44/USD, with the rand’s weakness “driven by domestic factors alone”, she said.

The rand has weakened significantly over the past week, with many pointing to United States President Donald Trump’s tariff announcement as the reason.

On 2 April, Trump announced a global 10% tariff on all imports and higher rates for the ‘worst offenders’, with South Africa being hit particularly hard.

South Africa was slapped with 30% tariffs on local goods exported to the United States.

However, Bishop said the rand’s weakness is largely attributable to local factors rather than this major global event.

“Without the threat of the DA exiting the GNU and hence the government of South Africa, the rand would be substantially stronger,” she said.

Bishop said the rand would be well below R18.00/USD after the US imposed universal tariffs, and many countries would experience higher protectionism. 

The uncertainty in local markets is due to the fragility of South Africa’s GNU following last week’s Budget vote.

The DA, the GNU’s second-largest party, voted against a key piece of Budget legislation last week after failing to use an increase in the value-added tax (VAT) rate as leverage to get backing for its policy proposals.

While the Budget was approved – without the DA’s vote – the party is now debating its future in the market-friendly GNU, which has led to significant uncertainty and, according to Bishop, a far weaker rand.

“The disagreement stemming from the VAT increases proposed in both the Budgets and spreading allocations has grown into a fully-fledged political party debate about the constitution of the GNU, creating huge instability,” Bishop explained.

Rand feels the pain

Discussions about the DA’s place in the GNU remain underway, and a cabinet reshuffle is expected if the ANC and DA do not overcome their difficulties. 

Some DA members wish to remain in government, and a compromise will be needed, while some ANC members are keen for the DA to leave.

“While a compromise is the solution financial markets seek, with the DA remaining in the GNU and able to function and exert some influence, some factions in the ANC are increasingly closed to the idea, welcoming the rift and an exit,” Bishop said.

She warned that the DA’s exit from the GNU would severely impact the rand, with the local currency expected to weaken past its prior weak point of R20.00/USD.

“The rand would likely head towards R21.00/USD immediately and then weaken to beyond R22.00/USD depending on the new partners of the GNU, with the sudden shock to financial markets and worries over a left-shift in economic policy,” she warned.

“Globally, the substantial increase in US tariffs has caused worries over US economic growth, and global financial markets were already risk-averse before the blow-up with the ANC and DA.” 

“While the US’ Liberation Day tariffs were broad-based and punitive, especially differentiated for a number of countries, the US is expecting many to be negotiated down.”

TreasuryONE director and head of market risk Wichard Cilliers echoed Bishop’s statements, saying the rand is testing the highs of May 2023 and has its eyes firmly set on breaking above the R19.50/USD level. 

“Usually, one will look to other EM peers in order to gauge if this move was down to broad-spectrum EM weakness or if it is currency-specific,” he said. 

“Granted, the tariff plan by President Trump has thrown a spanner in the risk-averse basket, but looking at the rand against its EM peers, it becomes evident that a local factor is still at play with the rand.” 

“That can only be the political uncertainty of the GNU and the viability of the government after the Budget debacle of last week.” 

He said that while being on the “naughty list” of global currencies has not helped, it is difficult to see the rand staging a big comeback in the short term. 

“Any correction could take a while as the current risk sentiment and uncertainty wash through the market,” he warned.