By Bianca Botes
A key feature of the recently released gross domestic product (GDP) figures is the mounting cost of an inefficient economy and its impact on growth prospects for the country.
The economy contracted by 0.2% with load shedding and bottlenecks at port and rail operations playing a key role.
1. Urgency is required: it’s an SA story
While the rand typically takes its direction from global markets, the number of South African specific factors are beginning to take their toll. This is weighing on our growth prospects and reflecting in the performance of the currency.
Current estimates are that the issues at Transnet alone are costing the country more than R1 billion per day, or 5% of GDP growth annually.
The South African economy is closely tied to the performance of key trading partners including the US, Europe and China that are seeing early signs of an economic slowdown.
The mining and agriculture sectors both experienced slowdowns in the third quarter with weaknesses in commodity prices hurting the resource sector, while agriculture operators were negatively impacted by factors such as the Avian Flu and flooding.
The rand is sensitive to both global and local factors, the inflation and interest rate environment mostly drove the global currency markets’ performance, however, local idiosyncrasies also weighed on the rand, such as the geopolitical and fiscal policy uncertainty as well as ongoing concerns around Eskom and Transnet.
2. The rand has room to improve
While no one has a crystal ball, the rand stands to benefit from the anticipated rate cutting cycle that is due to come into play towards the second and third quarters of 2024. One, however, needs to bear in mind the structural and peculiar risks associated with the rand, and that the rand will likely trail its peers over the medium term when appetite for emerging markets return.
The key question will be whether policy makers in South Africa have the same flexibility around monetary policy and interest rates as their counterparts in other markets.
Consumer inflation increased for a third consecutive month in October coming in at 5.9%, verging on the upper limit of the South African Reserve Bank’s inflation target range. Elevated inflation levels give the Reserve Bank no room to cut rates in the near term, which will continue to place pressure on disposable income.
3. Multi-national corporations (MNCs), importers and exporters have an opportunity to review their forex and hedging strategies.
Multiple converging detractors have darkened South Africa’s economic outlook and increased risks of commercial disruption for MNCs, importers and exporters and this may be an ideal opportunity for businesses to review their hedging strategies going into 2024.
With a combination of hotly contested national elections in 2024 adding an additional dynamic to the already uncertain geopolitical and economic environments, Emerging Market currencies - including the rand - could find themselves facing significant volatility.
While volatility poses risks to importers and exporters, it also poses opportunities to lock in rates at opportune times by way of hedging.
However, by not hedging when the market presents opportunity, importers and exporters can easily find themselves in a position where they are forced to convert currency at poor rates, and this is where expert advice can make all the difference.
Bianca Botes is a director and Treasury Partner at Citadel Global.
BUSINESS REPORT