Investors giving up on South Africa

Fixed income and currency analyst at Rand Merchant Bank Kim Silberman said the rand’s weakness reflects not only foreigners withdrawing from the country but also locals’ withdrawal.

The rand has been weak for much of 2023, as it has been trading above R18/USD since April. 

This year, the biggest blow to the rand came when the US ambassador accused South Africa of supplying arms to Russia in mid-May. This accusation saw the rand plummet 2.4% to R19.34. 

Many expected the rand to recover following the SARB’s 50 basis point interest rate hike, as hawkish interest rate hikes tend to reflect a central bank’s control over a country’s inflation.

However, the SARB’s hike seemed to have had the opposite effect, as the rand plummeted to a new low.

The announcement saw the rand fall significantly, and it has been trading above R19.50/USD since.

Many experts have a negative outlook on the local currency, predicting that it will breach R20/USD – a low the country has never seen.

Silberman told 702’s The Money Show that there is no good explanation for the market’s reaction to the interest rate hike. 

“I think if you asked any economist prior to the meeting, what the rand would do if the SARB hiked by 50 basis points, nobody would have said you’d see a run on the currency,” she said.

Regardless of the reason, Silberman said that South Africa’s structural risk premia have risen, and there are many reasons for this.

One reason is the country’s geopolitical risks, which were likely top of mind for investors following the US ambassador’s accusation.

The country also has fiscal risks, as South Africa’s muted growth does not bode well for its significant fiscal deficit.

According to Silberman, these risks likely spooked investors, causing a run on the rand.

However, she said not only foreigners have sold out of local bonds but also South Africans. 

Like foreign investors, South African investors are increasingly moving their assets offshore.

“If we look at some of the figures, you can see that local asset managers had an allocation to foreign equities of around 26% at the end of 2019, and those have risen to 31%,” she said.

Local managers are, therefore, increasing their allocation to offshore equities and bonds.

“So not only are foreigners moving out of South African assets, but our local investors are also moving out of South African assets,” she said.

“So you’ve got, unfortunately, a flow that is moving in one direction.”

Negative feedback loop

Efficient Group chief economist Dawie Roodt pointed to two possible explanations for the rand’s weakening following the SARB’s rate hike.

The first explanation points to SARB governor Lesetja Kganyago, who expressed concern for the country at the recent Monetary Policy Committee (MPC) meeting.

Roodt said Kganyago’s concern could have “spooked” the markets, as he said there are likely to be more upside risks to inflation in the coming months.

The second explanation is that the financial markets “are simply not believing the Reserve Bank anymore” and do not believe that the SARB can lower inflation.

Regardless of the reason, Roodt referred to the market’s reaction as an “overreaction”.

He warned that should the current levels of rand weakness be maintained, it will create a “negative feedback loop”.

In other words, inflation will rise if the rand remains this weak, and the SARB will have to keep hiking interest rates, weakening the rand further.