US and its allies will continue to ‘punish’ SA through the Rand

The Rand has fallen further against the dollar and all major currencies, thanks mainly to its perceived pro-Russia stance, deceasing to R19.85 at one stage, very close to the psychological barrier of R20 against the dollar.

The local currency opened relatively significantly weaker at R19.80/US$ and even weakened further to 19.85, compared to yesterday’s opening rate of 19.68. This is the worst ever opening rate of the Rand against the US dollar.

The latest decrease in the exchange rate comes after the South African Reserve Bank (Sarb) warned that sanctions due to its relationship with Russia could threaten South Africa’s financial stability in its latest Financial Stability Review and the department of international relations and cooperation extended diplomatic immunity to specific individuals attending the Brics Summit in South Africa in August.

Prof. Bonke Dumisa, an independent economist, says the Rand is back to even weaker levels, opening significantly weaker against all the three major foreign currencies, with the US dollar now even closer to crossing the R20 psychological barrier.

“While it is a fact that the unending Eskom rolling blackouts have many negative multiplier effects on the South African economy, the reality of the recent significant weakening of the Rand, at least since 12 May, is that the rand will continue being battered as long as the Russian invasion of Ukraine continues and South Africa continues to be perceived as supporting Russia.”

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US punishing SA through Rand

He says the US and its allies will continue “punishing” South Africa through the Rand.

“South Africa’s dilemma is that it must realistically and pragmatically weigh the cost of saying South Africa is non-aligned on the issue of Russia-Ukraine conflict, where those who are pro-Ukraine view the country as being pro-Russia.”

South Africa’s relationship with Russia is mostly a sentimental one because Russia supported the liberation struggle against apartheid.

“Many will label me as counter-revolutionary for directly facing the elephant in the room, but it is under these circumstances that the Rand is used as a weapon of mass destruction against South Africa. What will prevail under these circumstances: economic realities or political sentimental attachments?”

Dumisa says it looks like the US dollar will soon break through the R20 to the dollar barrier, but the currency also lost ground against other currencies. The Rand opened relatively significantly weaker at R24.47/UK£ against the UK Pound Sterling, also the worst ever opening rate of the Rand against the UK Pound Sterling.

It did not look good against the euro either, with the Rand opening significantly weaker at R21.17/€ against the European Union’s Euro. The gold price also opened significantly lower at US$1942.

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Consequences of Rand sell-off

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the Rand tends to be a barometer for emerging market risk, but idiosyncratic factors have overshadowed this.

“The Rand sell-off arguably outpaced a potential deterioration in underlying fundamentals, but reputational risks via the external trade channel suggest that the local unit remains vulnerable to further depreciation.”

Advanced economies’ central banks accelerated policy normalisation which led to increased market volatility and increased the risk of capital outflows for emerging markets over the last year.

“South Africa is a relatively small open economy and is especially vulnerable to these risks. The recent bout of rand weakness means the Sarb is attentive to the risk of capital outflows.”

Fortunately, South Africa currently has a positive real interest rate of 1.45% but it has yet to revert to historical averages.

US debt ceiling negotiations, together with the possibility of further US monetary policy tightening, complicate matters further, Van der Linde says.