Welcome back to your Weekly Rand Review, where we navigate the highs and lows of the South African Rand while keeping a keen eye for opportunity.

Another record-breaking week for the Rand - but for all the wrong reasons. Evidently, markets are casting judgment on SA.

Investors are resetting their bottom-line expectations for the country - and the emerging verdicts aren't looking good. The local unit has free-fallen this year, and last week it buckled to its weakest point yet again, registering an all-time low of R19.91 for a single dollar.

The causes are diverse, and some more damaging than the next, but the ongoing and deepening power crisis undoubtedly remains the major elephant in the room.

...not to mention the dual Russia crises that are running alongside it.

Beyond the commonly known issues, alarm bells are blaring in the steadily weakening local assets and bond markets, and to add the cherry on top of the Rand’s woes last week came the commentary from SARB, which added to the already gloomy picture for future prospects of our economy.

A really tough week. Here’s how it unfolded.

Key Moments (29 May - 2 June 2023)

Here are what made the headlines last week:

• Dark Days Ahead - - Murmurs of a potential total grid collapse increased in volume last week as several banking institutions, including the South African Reserve Bank, made known that they are taking the necessary precautions to ensure systems are protected in the event of a total blackout.
• Manufacturing Slump - - According to the latest results from the Absa Purchasing Managers’ Index, local manufacturing activity contracted for a fourth consecutive month in May, with a particularly sharp drop in expected business conditions.
• Diplomatic Immunity - - Geopolitical tensions intensified further last week as the government announced - and gazetted - that it would grant diplomatic immunity to all attendees of the BRICS summit (including Vladimir Putin), which is scheduled for later this year.

Markets and local unit investors have had time to digest the mayhem in the local currency following last week’s interest rate hike and subsequent commentary from the SARB.

Following the MPC’s decision to increase the repo and prime lending rates to 8.25% and 11.75% respectively the previous week, the Rand fell to its freefall to its weakest level ever at R19.81/$. Kicking off on Monday, the Rand had recovered somewhat to open at R19.67/$ and traded sideways with no major data points expected.

However, there’s never a dull day in SA.

By evening, the South African government announced that it has decided to grant diplomatic immunity to all attendees of the BRICS summit scheduled for August this year, including Russian President Vladimir Putin.

This causes a bit of an issue.

The International Criminal Court - which South Africa remains a signatory to - have a warrant of arrest for the Russian President, and needless to say, the decision taken by the government to try and sidestep their obligation to the ICC wasn’t received well.

SA-US relations are continuing to walk a tightrope over the growing relationship between South Africa and Russia, and the effects have already weighed heavily on the Rand. To put this into perspective - if there is a total breakdown of SA-US relations, there is an extreme likelihood that the EU would follow its Western ally.

And based on recent news, the US is watching every one of SA's steps very closely!

As it stands, roughly a quarter of SA’s exports to the US benefit from agreements like the Africa Growth Opportunity Act and the Generalised System of Preferences (GSP)…

…while, more significantly, 98.7% of exports to the EU benefit from the European Partnership Agreement (EPA). In the event of these agreements and benefits ceasing, the cost would be in the billions! Here are some of the projections:

• Removal from AGOA and GSP = R59.2 billion worth of exports
• A complete ban on trade with the US = R178 billion
• Expulsion from the EPA = R434.8 billion (roughly 25% of SA's total export revenue)
• European trade contributes around 15% of SA’s GDP, while US trade contributes around 4.7%

These are significant - and something that SA can ill-afford to lose!
Following the diplomatic immunity announcement, though, came a crucial response from local shores rather than abroad.

The SA Reserve Bank delivered a firm warning that the decision taken on the government's stance toward Russia increases the risk of sanctions being imposed on South Africa, which may hold dire consequences for the entire financial system!

It didn’t take long after that to see the effects of the warning from the SARB, as the Rand set off on its first ascent of the week overnight, setting a new low of R19.86/$ by Tuesday morning.

Eish-kom (as usual) added to the downbeat mood, ramping back up to Stage 6 while the National Treasury released results showing that the indebted state-owned power utility had paid R21.4 billion for diesel in the year to March compared to R10 billion a year before!

The energy availability factor - which is a measure of the usable capacity - was shown to have dropped to 56% from 62% a year earlier, mainly attributable to unplanned outages. In addition, the utility’s finances are in an even worse state (yes, it is possible!), with loss before tax nearly doubling to R21.2 billion from R11.9 billion. Gross debt, including borrowings, increased by a further 11% to a whopping R439 billion over the same period!

All that money spent and the result?

Yes, the grid collapse speculation gained major media attention in the week as several banking institutions, including the South African Reserve Bank and the JSE, made known that they are working on contingency plans in the event of a total failure of the electric grid. Banking sector officials revealed that they are now working with several other sectors, diesel suppliers, merchants, and retailers, to ensure that they can raise the financial sector's resilience…

…and ensure the orderly closing and reopening of markets if and when the need should arise.

According to the SARB’s latest review, the electricity load shed this year has already surpassed the entire of 2022 and has increased by 4.7x in the last two years. The Rand remained on the back foot for most of Wednesday, hovering in the mid-R19.70s before the next gut punch came from SARS, who unpacked the local trade balance, showing a significant reduction from the prior year.

The year-to-date surplus was recorded at R3.5 billion in April, a drop of 81.5 billion over the comparable period in 2022! Despite exports increasing by 7.4% over the period, imports increased by a staggering 17.5% from R136.1 billion in April 2022 to R160.3 billion in April 2023.

A potential deficit next?

Stats SA will publish GDP results for Q1 next week, and following a 1.3% decline in Q4 of 2022, the prospects of avoiding a technical recession don’t look too good. By Thursday morning, the greenback found support following the passing of a bill to suspend the $31.4 trillion debt ceiling, which has been threatening to create a catastrophic default in payments by the world’s top economy.

A Republican-controlled House voted to send the legislation to Senate for review and on to President Biden before next Monday’s deadline, at which point the US is expected to run out of money to pay its bills.

The legislation is said to temporarily remove the Federal government borrowing limit until the 1st of January 2025 and includes certain caps on government spending over the next two years...

Following that, the dollar gained over most emerging currencies, and the local unit slumped to yet another record low of R19.91/$ before lunch on Thursday.

Over the evening trading session, the Rand made some ground back to R19.62/$ but was still on course for another loss-making week before the final piece of key data for the week was released in the form of the US jobs report.

But before that, here’s a quick look at some of the other headlines from the week:

• Inflation in Europe took a positive turn in May as results in the week showed a significant drop to 6.1% from 7% in April, according to the EU stats agency, Eurostat. Food prices across the bloc rose by 12.5% in May, down from 13.5% a month earlier, while core inflation also ticked lower to 5.3% from 5.6% in April.
• Economic activity in the US manufacturing sector continued its downward trend in May, with the ISM Manufacturing PMI falling to 46.9 from 47.1 in April. The results mark the seventh consecutive contraction in the sector, which is the longest stretch since the Great Recession.

The Rand gained in early trade on Friday morning as the US debt ceiling nerves continued to ease. A strong jobs report from the US showed that nonfarm payrolls increased by 339,000 jobs last month, continuing a solid trend from the upwardly revised 294,000 jobs added in April…

…which raised bets that the Fed may stand still on interest rates in June.

After opening a shade below R19.60/$, the local unit steadily improved thanks to a weakening greenback and managed to see the week out in the R19.50/$ region.

A sight for sore eyes!

Finally, a week in the green for the local unit after the initial pain!

The sentiment couldn't have got worse than the past couple of weeks, and it has reflected in the exchange rate...

...have we finally reached an extreme?

...is this the turning point for the local unit?

The Week Ahead (5-9 June 2023)

Into the final month of Q2 we head, and here’s what we’ll be keeping an eye on next week:

• SA - S&P Global PMI, GDP Growth Rate QoQ (Q1), Current Account (Q1), Manufactuirng Production YoY (Apr)
• EU/UK - EU PPI MoM (Apr), EU Retails Sales YoY (Apr)
• US - ISM Services PMI (May), Balance of Trade (Apr)

While the local currency had firmed somewhat at the back end of the week, it is still some way from being considered a recovery - and from a fundamental perspective, is expected to be on the back foot for the foreseeable future...

...but you will know (if you have been with us long enough) that fundamentals do not drive the market in the short to medium term. Mass human sentiment does. And when everyone seems to have given up any hope, a market often reverses, even on the back of bad news...

On that note, this week’s GDP release could be a significant trigger (especially if we find out that the country fell into a technical recession in Q1 this year).

Based on our current analysis and forecasts, we are likely to have some interesting - and surprising - days and weeks ahead.

Join us again next week to find out how it goes.

Happy trading!

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To your success~

James Paynter

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