The rand plunged to an all-time low against the US dollar on Friday, reaching R19,52, exceeding the R19,35/$1 level reached at the height of the COVID-19 pandemic, as a result of a diplomatic row between South Africa and the US over Russia’s invasion of Ukraine.
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The currency fell as reports that South Africa may have supplied military equipment to Russia added to a string of unfavourable information, including the worsening electricity outages and their detrimental effects on economic growth and the state of the public finances.
Reuben E. Brigety II, the US ambassador to South Africa, stated that the country had ‘uploaded weapons and ammunition’ to the Russian ship, Lady R, in December when it berthed in Simon’s Town harbour outside of Cape Town.
‘We are confident that weapons were loaded on to that vessel, and I will bet my life on the accuracy of that assertion,’ Brigety said.
Despite Brigety’s apology for his comments, the financial markets were in turmoil as a result of the diplomatic row, which caused the rand to drop to yet another record low.
Over the course of the week, the rand suffered losses of over 5% in three days as a result of investors’ worries over the slowdown in economic activity brought on by more frequent loadshedding.
In an interview with Business Report, Investec Chief Economist Annabel Bishop claimed that a number of factors, including elevated geopolitical risk, were to blame for the rand’s further depreciation. The recent greylisting of South Africa in February and the increasing loadshedding phases both hurt the country’s investment case.
According to Bishop, the majority of participants in the financial markets are from the West, which has come out strongly against the conflict in Russia and Ukraine. They are expressing their displeasure over the possibility that South Africa might be aiding the Russian war effort by selling off its currency.
‘Rand weakness is not expected to boost exports hamstrung by bulk commodity freight issues, as SA ports and rail capacity have waned, while electricity supply continues to weaken, with the rand underperforming other commodity currencies,’ Bishop said.
‘South Africa is a small open emerging market relying on commodity exports impacted by commodity price weakness.’
‘Headwinds against it have now grown, as SA is increasingly seen to be tipping its favour towards the Russia/China camp, and not fully neutral in its stance,’ she said.
In particular, the rand weakened further amid weaker domestic fundamentals, which were probably going to get worse due to more frequent power outages during the winter.
Bishop said that if the rand’s notable weakness persisted, it would add to the inflationary pressures that have already been growing as a result of the increased pass-through effect.
This would increase the likelihood that the SA Reserve Bank announces a 50 basis point interest rate hike this month rather than a 25 basis point increase.
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US ambassador apologises for claims that SA is arming Russia
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