Welcome back to another edition of your favourite weekly Rand Review!

There’s never a dull week in the South African economy, and despite last week being relatively light in terms of economic data, it certainly was eventful.

Between political struggles, an intensifying energy crisis, and an overall poor economic outlook, South Africa has already gotten off to a bad start for the year, faring far worse than most of its peers…

…and unsurprisingly, questions are now being raised over how long the local unit’s underperformance will last and what the implications are for the path of inflation, interest rates, and a road to recovery.

An explosive interview, a potential economic greylisting, and the eagerly anticipated budget speech all added to the mayhem of the Rand’s performance last week.

Hold onto you seats - here’s the full scoop.

Key Moments (20-24 Feb 2023)

These were the major headlines over the last five days:

• De Ruyter breaks silence - An explosive interview of the former Eskom CEO Andre De Ruyter sent shockwaves through the country as he spilled the beans on the level of corruption and lack of law enforcement within the struggling power utility.
• SA Budget Speech - South African finance minister Enoch Godwana was set to deliver his budget speech for 2023, with onlookers keenly awaiting an explanation of the government's plans to solve Eskom’s massive debt burden.
• US FOMC Minutes - With renewed fears over prolonged rate hikes in the world’s top economy surfacing in recent weeks, all eyes were on the US Federal Reserve and their meeting minutes to provide clues on the trajectory of their monetary policies for the rest of the year.

Following another poor week last time around, which saw the local unit breach the R18/$ psychological barrier, last week did little to suggest that the Rand could make a swift comeback.

On Monday morning, the Rand opened the week at R18.03/$, level on its previous close, but still under immense pressure from local and international forces that threaten to add to the local unit’s gloom for the foreseeable future.

As investors steered clear of the risky local currency until the budget speech later in the week, it didn’t take long for the Rand to set off on its first ascent for the week and was up to R18.14/$ by mid-afternoon the same day.

After the January rally for most currencies, investor sentiment has been jolted over the last couple of weeks as a string of strong data points in the US sparked speculation over the possibility of the Fed extending its monetary tightening policy for a while to come.

The Rand, however, fared far worse than most, owing in large to the crippling impact of load shedding on the economy and its growth outlook.

Eskom and the drama surrounding the battling power utility has dominated local (and some international) headlines over the course of 2023, and last week, the saga took yet another drama-filled twist...

The now-former CEO of Eskom, Andre De Ruyter, provided an explosive exclusive interview on Tuesday that sent shock and awe through the country as he lifted the lid on his experiences and witnessings during his tenure.

In his one-on-one with eNCA’s Anika Larsen, de Ruyter explained that upon taking the role, he quickly came to the realisation that Eskom was a feeding trough for the governing party…

…and went on to cite several instances of corruption filtering through the power utility from top to bottom, including a particularly concerning allegation directed at a senior government minister.

De Ruyter explained that after expressing concern around costs relating to governance, he was told by the minister in question that “In order to pursue the greater good, you have to enable some people to eat.”

He went on to provide his account of the reaction to his reporting of the criminal activity to a senior official, which was possibly even more disturbing, by saying that the minister in question merely looked at the official and said, “I guess it was inevitable that it would come out anyways”.

Yes, you read that right!

The interview that was aired on national television saw De Ruyter touch on other points, including politicians' conduct within Luthuli House, and lamented law enforcement's response to criminal acts that he states happen “on a daily basis”.

It should be noted, though, that De Ruyter did not mention the exact names of those behind his allegations and has since been challenged to provide names of the perpetrators by several members of the government.

Following the interview, Eskom announced that De Ruyter, who was initially set to leave Eskom at the end of March, was asked to leave his position with immediate effect.

Chief Financial Officer Calib Cassim has emerged as De Ruyter’s successor and will fulfil the position as the interim CEO until a permanent replacement is confirmed.

In the aftermath, by Tuesday evening, the Rand was forced backward to R18.29/$ and was little changed overnight as the budget speech due later on Wednesday became even more crucial.

Ahead of the Finance Minister’s speech, investors were understandably nervous about placing big bets on the Rand, which caused the local unit to fall to its lowest level of the year at R18.38/$ before lunch.

Godongwana wasted little time getting to the heart of the matter of Eskom, and the outcome was somewhat unsurprising…

…with the minister outlining a debt solution for Eskom that entails the National treasury bailing out the power utility (again) by taking over R254 billion in debt repayments and interest costs and over R70 billion of loan debt over the next three years.

In other words (and in reality), taxpayers will be taking on the debt.

Nevertheless, he went on to explain that the government is budgeting for a primary surplus, not just for this year, but for the next three years as well.

Achieving it would be no small feat, but one has to wonder about the debt mountain that will be building in the background, which is projected to increase from R4.74 trillion in 2022/23 to R5.61 trillion in 2025/26!

Just a reminder - That's this much: R 5,600,000,000,000.00

On a more positive note, though, the minister also claimed that government will provide tax relief of R13 billion in 2023/24 and that the tax threshold would be increased to R95,750 from R91,250…

…fairly commendable in an environment where inflation is high and shows some long overdue sensitivity toward the difficulties being faced by ordinary South Africans.

However, the growth outlook - which has already fallen off a cliff this year - is expected to deteriorate even further, with National Treasury slashing its forecast to 1.4% growth up to 2025, down from the 1.6% it projected last October.

Just another indication of the storm clouds on the horizon for Saffers and the local unit.

The in-depth review from Moneyweb is over here

The Rand initially responded well following the budget speech and took back some ground, dropping to the mid-R18.10s, but that was before the focus shifted abroad to the US for a look at the all-important FOMC minutes.

As it turned out, Fed officials ultimately indicated that there were signs of inflation coming down but that it wasn't enough to counter the need for more interest rate increases.

Consequently, they also approved a 25 basis point increase, which is the smallest since March 2022, bringing the target range to 4.5% - 4.75%.

While the 25 basis point hike received unanimous approval, the minutes did note that not all officials were on board, thus adding to the recent narrative of funds rate peaking later than expected, at around 5.25 - 5.5%.

The minutes also showed that participants observed risks around the outlook for economic activity, the labour market, and inflation to remain elevated for the time being.

As a result, the greenback rallied overnight, and the Rand opened Thursday’s trade at R18.23/$ and continued to shed, falling back to the mid R18.30s before midday.

The final piece of local data for the week was the PPI results, which slowed to 12.7% in January from 13.5% in December; however, food producer inflation picked up to 14.6% from 13.6% over the same period.

The headline improvement in the local PPI helped the Rand gain some ground, ending Thursday at R18.22/$.

Meanwhile, in other news:

• Consumer Price Inflation in the Eurozone eased in January to 8.6%, down from 9.2% in December. However, the data would still make for grim reading at the ECB when seeing that core inflation accelerated to 5.3% from 5.2% in December. Policymakers are now concerned that what they considered an energy cost-driven surge is now overspilling to impact several other sectors. The ECB has already promised a 50-basis point hike in March, but markets are now tipping a possible 75-basis points in April, which would take the rate peak to 3.75%

• It was a difficult week for stocks as the three major indexes all suffered significant losses. The Dow Jones Industrial dropped 2.06%, S&P 500 slid 2.0%, and the tech-heavy Nasdaq Composite pulled back by 2.5% as investors weighed up the Feds statements and the possibility of longer-than-anticipated rate hikes.
• Meanwhile, the IMF made another anti-crypto move by endorsing a crypto asset policy framework that did not grant crypto assets an official currency or legal tender status on the basis that it was a necessary move to safeguard monetary stability.

And then, just when we were hoping to see the back of an exhausting week, Friday emerged - a day that could go down as one of the worst in recent South African economic history.

After months of speculation, our fears were confirmed as South Africa was greylisted by the global anti-money laundering watchdog, the Financial Action Task Force (FATF)!

A greylisting puts South Africa in the company of countries like Syria, Yemen, and Nigeria and serves as a signal to global banks and investors that the country is not compliant with anti-money laundering and terrorist financing standards!

In essence, it means that the cost of doing business in SA will increase, resulting from increased due diligence needing to be done by investors before placing their funds in the country.

Historically, greylisting has led to major declines in foreign investment and typically takes between two to five years to be lifted!

South Africa has already been bleeding foreign investments this year due to the current energy crisis, and being greylisted just adds the cherry on top of an already crumbling cake.

Within moments of the announcement, the Rand began to wilt at pace, widening to R18.48/$ after lunch before ending above R18.40/$.

A miserable end to a very sad week.

And another loss in the books.

The Week Ahead (27 Feb - 3 Mar 2023)

In a relatively light week of economic data, here’s what we’ll be eyeing up over the next five days:

• SA: Balance of Trade (JAN), S&P Global PMI (FEB)
• EU/UK: Core Inflation Rate YoY Flash (FEB)
• US: Durable Goods Orders MoM (JAN), CB Consumer Confidence (FEB), ISM Manufacturing and Non-Manufacturing PMI (FEB)

It’s tough being a Saffer right now. It’s arguably even tougher being an investor in the local unit.

At a time when the energy crisis is already deterring foreign investment, the greylisting by the FATF adds yet another layer of uncertainty around the future of the economy and the local unit.

During these types of periods of uncertainty, it’s best to play it cautiously and avoid risky moves.

As for us, we’ll be relying on our sentiment-based forecasting model for direction and to help us and our clients navigate the road ahead safely and confidently. You can too!

What next for the Rand, you ask?

We’ll find out in a week. See you then.

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To your success~

James Paynter