South African currency weakening at record pace
2023.02.10 08:21
South African currency weakening at record pace
By Ray Johnson
Budrigannews.com – The most industrialized economy in Africa’s currency is on track for its fourth weekly loss against the dollar – the longest losing streak since an emerging market-wide selloff in October. This time, only South Africa suffers from the underperformance. This year, the rand is already down 4.1%, while most of its peers are stronger, with Chile’s gains exceeding 6%.
In a note to clients, Daria Parkhomenko, an FX strategist at RBC Capital Markets, stated, “Since the start of the year, the rand has been one of the worst performers in EM.” We believe that the rand’s risk premium for the worsening power situation has been a major factor in this.
According to Parkhomenko, market confidence is low due to President Cyril Ramaphosa’s slow response to the ongoing crisis and the non-fulfillment of some promises to address the situation. She stated that the currency would rise if investors changed their minds.
She stated:
“All other things being equal, the pair would have space to sell off by almost 5% by our estimates.” From the current spot levels of 17.80, that would equate to 16.90/95.”
The price of Eskom Holdings SOC Ltd.’s credit default swaps is at its lowest level in approximately eight months. This is in anticipation of South Africa taking over up to two-thirds of Eskom’s debt later this year, which may be announced in the annual budget on February 22.
Bloomberg estimates that the state electricity company has cut off power for 13 months in a row. Ramaphosa said he would appoint a minister in his office who will focus on increasing the supply of power and declared a state of disaster to allow the government to respond more quickly to the ongoing energy crisis.
Parkhomenko said:
“This could be a good step.” But who will it be now is the question. Then, “What will transpire with the Department of Minerals, Resources, and Energy? Will Ramaphosa remove Gwede Mantashe from his position as director of this department?”
She stated, “The market will be required to carry an even larger risk premium if the crisis worsens, which is a scenario that cannot be ruled out.” If everything else were to remain the same, a more severe decline would most likely see the triple top tested at 18.50.”
