Welcome to our Weekly Rand Review, your trusted destination for the latest updates, analysis, and insights on South Africa’s currency.

Safe to say, May hasn’t been kind to the Rand.

In fact, in its entirety, 2023 has been something of a disaster for the local unit, which is down sharply in value against not just the US dollar, but other major currencies like the Pound and Euro, too. And the beleaguered local currency is even languishing behind its emerging market counterparts and has made a nasty habit of hitting new record lows along the way.

Its latest slide came in the week following the South African Reserve Bank’s MPC decision to raise interest rates for the tenth time in the current cycle…

…combined with the subsequent comments by the governor, which painted a bleak picture for the local currency.

With the Rand bleeding for South African consumers, and the economy as a whole, last week amounted to a true bloodbath.

Let’s get into the nitty-gritty.

Key Moments (22-26 May 2023)

Here’s what made the headlines last week:

• Local Inflation Cools - Annual consumer inflation in South Africa edged lower in April, reaching its lowest level since May last year; however, inflationary risks are still prevalent as food price inflation remains elevated.
• SARB Opts for 50bps - On Thursday, South Africa’s Monetary Policy Committee announced another 50 basis point hike to local interest rates while also expressing their concerns over the Rand’s recent meltdown and ever-growing price pressures.
• US Debt Default Looms - - The weeks-long see-saw between the Republicans and Democrats has begun to ring alarm bells with the June 1st deadline fast approaching - and both sides still at odds over how to trim annual budget deficits.

The Rand opened trade on Monday at R19.48/$ following a record-breaking previous Friday, where it reached its weakest level ever.

In contrast to what’s become something of a trend in recent weeks, the Rand enjoyed a strong start to the week and had already made inroads a couple of hours into the trading day, dropping to R19.20/$ before lunch. The gains made were much more attributable to luck than to progression, though, mainly due to S&P Global deciding to hold off from making a decision on SA’s credit rating the previous Friday.

Then, early in the week, Sovereign Africa Ratings (SAR) released its latest ratings of South Africa and affirmed the country’s long-term rating at BBB and short-term at B+, with a stable outlook.

It’s been a while since we heard stable and SA in the same sentence!

The major difference between SAR’s approach and other rating agencies is that the former takes into account the structural nature of developing economies, including consideration for resource endowment beneficiation. SAR did point out the electricity shortage as the main challenge facing South Africa and concurred with forecasts that it will shave as much as 2% off the country’s GDP.

Speaking of Eish-kom, the collapsing power utility is under pressure yet again, but this time in the form of its worker's union, Numsa.

The union has rejected the most recent salary increase offer made by Eskom of 4.5%, holding steadfast to its own demands of a 12% increase…

…but that’s not all.

On top of the 12% increase, Numsa has also demanded the following:

• Housing allowances to be increased to R7000
• Employees to be allowed to purchase homes anywhere in SA
• Increasing medical aid contributions to 80% (20% to be paid by employees)
• Cell allowance of R1000
• Electricity allowance of R1500
• R1500 essential worker/ danger allowance, as well as a separate allowance for voltage work which would operate on a sliding scale
• A performance bonus equivalent to 25% of annual salary
• Study benefit of R20000 per child
• R10000 vehicle allowance through Eskom’s vehicle X-scheme

Quite a shopping list!

Enough to make one want to reconsider their career path.

The union went further to add that it feels that Eskom has the money to compensate its workers “properly”, mentioning that the recent 18.5% tariff hike was a perfect example of this point.

Oh shame, you would think these poor employees must really be getting a hard deal!

May we remind you of the facts...

...which we published in our Rand Review of 30 Jan 2023 Rand Review:

"In their March 2022 financial statements, Eskom stated that "...employee costs have remained relatively stable at R33 billion, despite a reduction in headcount of 5.4% to 40 421 by year end"....

...which equates to an average salary package of R816 407 per annum!!

How can any company justify that kind of cost??

With this in context, and in the current dire situation, Numsa's claims and demands are nothing short of outrageous!

This is unions doing what unions do best - holding companies to ransom, when the chips are down - even if persons lose their livelihood as a result..

...and worse, this is not just holding a company to ransom - this is the country!
If Eskom workers embark on strike action again, the current situation will likely become critically worse, quickly!

With little economic data results for the first half of the week, the local unit traded sideways in the R19.20/$ region as we headed to the crucial inflation results on Wednesday afternoon. Stats SA revealed that South Africa’s consumer inflation had slowed to 6.8% in April from 7.1% a month earlier, marking its lowest level since May 2022, when the rate was recorded at 6.5%...

…however, core inflation remained at 5.3%.

Despite annual inflation for food and non-alcoholic beverages easing slightly to 13.9% in April for 14% last month, it was still the largest contributor to the headline figure, accounting for 2.4 percentage points of the total. Producer price inflation, meanwhile, showed notable improvement, dropping from 10.6% in March to 8.6% in April - the lowest reading since October 2021...

...among the top contributors to the positive reading was a slowdown in the price of manufactured goods, especially coke, petroleum, and chemicals. Improvements in headline inflation and producer inflation rates are a sight for sore consumer eyes, but there are still several risks about that could derail the progress made.

However, the Rand was little affected by the CPI results and was changing hands at R19.22/$ by the close of business on Wednesday.
It was shaping up to be a much-needed good week for the local unit up to that point...

...but as Thursday dawned, it all started to fall apart - fast!

Following the CPI results from 24 hours earlier, the MPC announced another 50 basis point hike and the tenth increase in the current cycle, which dates back to November 2021. The MPC went on to explain that they assess risks to the inflation outlook to the upside as food inflation remains elevated, especially with power concerns and its knock-on effects expected over winter.

They further explained that tighter financial conditions raise the risk profiles of economies that need foreign capital, and with the recent issues that have contributed to the local unit’s demise over the last few weeks, "further weakness in the Rand should be expected".

In a Q&A session following the 50 basis point announcement, Governor Lesetja Kganyago admitted that the exchange rate is not something that the central banks can control and that they cannot stop the currency from depreciating…

…while also confirming that the SARB expected further currency weakness ahead.
Kganyago then pointed out that the central bank has hit what it considers “restrictive territory” with hikes and that they now have to see the effects of this stance.

In all fairness, the governor has built a reputation for straight talking and was simply stating well-known facts…

…but, currency traders, who are already in predatory mode toward the Rand, sensed blood in the water and began to circle, and markets moved in a brutal fashion for the local unit.

The notes of the MPC over the outlook of the already downtrodden Rand took its toll, and the local unit tanked to R19.70/$ by mid-afternoon and onward to R19.77/$...

…breaking the typical market reaction where tighter monetary policy encourages currency’s growth.

Adding to the balancing act is the need for SA to keep up with US rates, but following aggressive moves by the Fed over the last year, the differentials in rates have shrunk. The US has hiked by a massive 500 basis points in its current cycle, while even after the most recent increase, South Africa is only at 475 basis points…

…and, while most countries have indicated that they may have come to the end of their rate hiking cycles, the door has been left wide open for another increase in SA at the next meeting in July.

Meanwhile, in Washington, the hotly debated debt ceiling debacle continued to rumble on in the week, with the standoff between the Republicans and Democrats making very little headway. House Republicans are refusing to raise the legal limit unless President Biden imposes federal spending cuts and restrictions for future spending.

The nation’s debt is now at $31 trillion, which, according to the Republicans, is unsustainable (true story!), and they are demanding reforms, including stiffer works requirements on those that receive government cash aid, food stamps, and medical aid.

The Democrats, up to now, oppose those demands.

Biden, on the other hand, wants to increase certain taxes on the wealthiest Americans and some of the biggest US companies, but the opposition has emphasized that that is not an option.

US (and global) debt concerns are now growing at pace as estimates suggest that a prolonged default in payments by the US could cause 8.3 million job losses, while even a brief default could lead to as many as 500,000 job cuts.

A default of no longer than seven days is being estimated to lead to the loss of 1.5 million jobs and, quite possibly, a world-shaking recession. While the ramifications of a debt default dominated most US news, the developments around US rates largely fell by the wayside.

So, after signaling a possible halt in June, what did we take away from the FOMC’s minutes?

Well, firstly, they were less than comforting in terms of ongoing rate hikes, with some members indicating that the return to 2% inflation is taking much too long and required further hikes…

…while others were of the mind that if they hike too far, they risk cooling the economy too quickly.

For now, it seems like a case of “wait-and-see” on this front.

In terms of fears in the banking sector - these featured, but largely downplayed, with members making an assessment of the sector as “sound and resilient.” Overall, there was almost no reaction to the minutes, with the debt ceiling talks hogging the spotlight, which meant that the local unit had no chance to claw back any ground before heading into Friday.

But, before we get to that, let’s have a quick look-see at some other headlines from around the globe:

• The UK brought an end to a seven-month period of double-digit inflation as the Office for National Statistics reported that the Consumer Price Index fell from 10.1% in March to 8.7% in April. The improvement marked the biggest annual drop in inflation in three decades. Grocery price inflation also cooled slightly but is still near record highs at 19%.
• The IMF adjusted its global growth outlook for 2023 in the week, citing “surprisingly resilient” demand in the US and across Europe and China’s reemergence from strict restrictions as the key reasons. They are now forecasting 2.9% growth in 2023, up from 2.7%, but still some way from the 3.4% recorded last year.

The Rand set another record-low overnight, hitting R19.81/$ briefly, before opening Friday trading in the mid-R19.70s.

The greenback gave up some ground to most emerging currencies as the debt ceiling talks continued, which gave the local unit a slight bump to the R19.60 region…

…but it was not enough to prevent another loss for the week!

The Week Ahead (29 May-2 June 2023)

In a relatively thin week of data points, here’s what we’ll be keeping an eye on over the next five days:

• SA - Balance of Trade (Apr), Absa Manufacturing PMI (May)
• EU/UK -EU Consumer Confidence (May)
• US - CB Consumer Confidence (May), ISM Manufacturing PMI (May), Unemployment Rate (May)

Taking inflation risks, geopolitical tensions, and load-shedding, among other factors, into account, further weakening in the local currency looks increasingly likely. While most currencies tend to receive a boost after rate increases, the Rand collapsed after the latest hike...

...and a crucial question to ask is, Why?

Perhaps the “failed state” narrative is starting to seep through the currency market?

Are investors fearful that South Africa is going to fall over the fiscal edge due to a growing interest burden on government debt combined with lower revenue?

Either way, it spells trouble for the local unit, which is staring R20/$ in the face...

...but as we have often said, it is when things seem the bleakest and when there is almost no-one to turn Rand-bearish, we are likely near an extreme in price...

The next few weeks should prove interesting, though turbulent!
Tread safely, and we’ll see you next week!

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To your success~

James Paynter

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