Welcome to the Weekly Rand Review, your go-to source for staying updated on the latest developments surrounding the South African Rand.

It was another week where good news sidestepped the local economy, and with limited data results expected, the Rand found it difficult to make headway following a prior catastrophic week. Over the past weeks, we've witnessed the Rand facing a series of challenges that have had a significant impact on its performance…

…from load-shedding to geopolitical instability, it's been a rollercoaster ride for South Africa's beloved currency. SA’s alleged sale of arms to Russia has pummelled relations with some of its biggest trade partners, and confidence in the local government and economy is at the lowest point since the dawn of democracy.

Where there’s smoke, there’s fire! And boy, oh boy, there’s a lot of smoke about at the moment.

Let’s dive in.

Key Moments (15-19 May 2023)

In a thin week of economic data, here’s what caught our attention:

• SA Retail Sales - Statistics SA released the important local retail sales results in the week, showing a fourth consecutive drop as rising food costs and higher interest rates continue to chip away at Saffer's earnings.
• Local Unemployment - South Africa's unemployment rate worsened in Q1 of 2023, according to reports in the week, with a concerning trend noted that is affecting the country’s poorest and most vulnerable workers.”
• “Truth to Power” - The latest twist in the tale between Andre De Ruyter and Eskom made headlines again last week as the former CEO published a tell-all book called Truth to Power: My Three Years Inside Eskom.

Following a nightmarish end to the previous week, the Rand opened trade at R19.05/$ on Monday morning but was still under pressure with the worst power cuts on record looking set to worsen as winter approaches. With no major data expected in the day, the local unit traded sideways in the first half of the week, teetering in the R19.10/$ region.

The Rand had the previous week breached above R19.50/$ (its worst level ever), following allegations regarding the supply of weapons and ammunition to a Russian ship that docked in the Western Cape last year. A lacklustre response to the allegation has left key international relations on a knife-edge, and fears are growing that it may tip over…

…which would have dire consequences for all Saffers.

Potential sanctions (or worse) have spooked investors who are already using a fine-toothed comb to search for any strand of positivity to support their exposure in the local economy…

…and the failure of the government to quickly and transparently dispel the allegations raises even more concerns over the extent of SA-Russian relations.

Is it merely a case of the ruling party being completely out of its depth and incapable of balancing diplomatic actions with economic consequences?

Ultimately, if there is a pro-Russia policy in the making, it will cost the country dearly!

Russia currently offers South Africa virtually no commercial benefit (at least according to official trade numbers...so that is as far as we know), but speculation is clearly growing around the possibility that Russia may be financing key members in leadership in return for loyalty.

It seems crazy, but in SA, and with the ANC's Russia history, it is more than likely...

Meanwhile, on the energy front, Andre De Ruyter was back in the spotlight last week as reports emerged that the former Eskom CEO had published a book entitled Truth to Power: My Three Years Inside Eskom.

In his book, De Ruyter discusses several points of interest, including the vetting process of the State Security Agency and his account of the details surrounding his communication with Pravin Gordhan regarding the politicians involved in corruption at Eskom. Gordhan did appear in front of Scopa in the week but also refused to reveal the names of the politicians that De Ruyter disclosed to him…

…citing that the allegations were made on preliminary information from incomplete and untested intelligence reports which had no evidence attached. This brings the Eskom corruption blame game full circle, and clearly, no one is willing to put on record the names of the “high-ranking” politicians that are allegedly involved.

Seems like this is going to go on forever...

...because no one is willing to risk the consequences of implicating the officials when it could be life-threatening - as De Ruyter found out with his cup of coffee.

By midweek, a combination of local and international data results began to force the local unit backwards after opening at R19.08/$.

On the local front, Stats SA released its latest round of retail sales figures, showing a 1.6% drop off from a year earlier. Among the main contributors were general dealers and retailers in food and beverages. The latest retail sales results mark the fourth consecutive month of decline in local retail activity and the largest monthly drop recorded in the last year.

Next came the local unemployment figures, which also disappointed, as unemployment in SA ticked upward in Q1 of 2023, from 32.7% in Q4 last year to 32.9% at the end of March.

A particularly concerning statistic picked out was that 85,000 jobs that were lost came from private household employment, which is domestic workers and gardeners. This serves as just another indication of the extent of financial strain that middle-class households are experiencing by having to cut out domestic workers…

…while it also suggests that emigration is increasing exponentially, leaving thousands of domestics without employment as wealthier Saffers flock to greener pastures.

Madam, by the looks of it, is dispensing with Eve...

Meanwhile, over in the US, a topic of much debate last week was around the raising of the world’s top economy’s debt ceiling. The debt ceiling outlines the maximum amount of outstanding debt the US government can incur, and in January this year, the nation's total debt and debt ceiling were both standing at $31.4 trillion.

All changes to the debt ceiling in the US require majority approval by both chambers of Congress, and debates between the parties in the week caused many to fear the worst…

…as a potential default in payments from the US could have drastic consequences on foreign trade.

However, reports later in the week suggested that there was headway being made between the Republicans and Democrats in this regard and that they would likely come to some consensus in the next few days.

Anyway, the news seemed to give the greenback a boost over most major currencies, including the Rand, which dropped to R19.34/$ on Wednesday afternoon.

But it got worse for the local unit on Thursday as interim Eskom group CEO Calib Cassim took to the stage to provide an update and answer questions at the State of the System briefing.

Cassim confirmed that the risk of stage 8 loadshedding in winter is “extremely high” if the group is unable to contain unplanned losses.

He went on to explain that the power utility and system operators have been hard at work developing a loadshedding mitigation focusing on the energy availability factor (EAF) of power stations.

Eskom chair Mpho Makwana echoed the sentiments and also touched on potentially cutting planned maintenance and turning to OCGTs to keep the lights on…

…however, as we’ve become used to, it all sounded like a re-hash of what’s been said (and promised) for over a decade.

The announcement of their Winter Plan and confirmation that stage 8 power cuts are firmly on the cards dampened sentiment towards the Rand, and by lunchtime, the local unit shot to R19.49/$ before settling in the mid R19.30s by the end of the day.

Then, in other news:

• The number of active workers on employer's payrolls in the UK dropped for the first time in over 24 months, indicating that the flatlining economy has well and truly begun to take a toll on the labour market. The Office for National Statistics revealed that 136,000 Brits lost or left employment between March and April, while strike action rose notably, especially in the health and education sectors.
• US retail sales rose by 0,4% MoM in April, following a 0.7% decline a month earlier. The rebound experienced in April was mainly attributable to an increase in automotive and related spending as well as in building materials and equipment.

On Friday, attention was on the Fed boss Jerome Powell as he emphasised the central bank’s commitment to return inflation to its 2% goal as part of his monetary policy meeting.

Several Fed officials also addressed the media in the week and, in the main, sang the same tune as Powell, increasing bets that there could be yet another rate hike incoming.

The dollar received a boost following the meeting, and the Rand was once again against the ropes, breaking above R19.50/$ momentarily before ending the week in the mid-R19.40s.

Yet another week in the red!

The Week Ahead (22-26 May 2023)

Here’s a quick overview of what we’ll be eyeing up next week:

• SA - PPI YoY (Apr), Interest Rate Decision
• EU/UK - UK Inflation Rate YoY (Apr), UK Retail Sales YoY (Apr)
• US - FOMC Minutes

Saffers will turn their focus to SARB's latest interest rate decision, which most expect to come in at another 25 basis points.

However, with the recent walloping the Rand has endured, another 50 basis points is certainly not inconceivable.

The Rand will likely be feeling the headwinds for the foreseeable future, regardless of the interest rate decision, with domestic factors leading the charge in undermining any positive sentiment... but at what point do we reach an extreme?

Until next week. Safe trading!

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James Paynter

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