A perfect storm: SA’s energy crisis & political blunders cause rapid devaluation of the Rand

Tamela Perfect Storm Article

A perfect storm: SA’s energy crisis & political blunders cause rapid devaluation of the Rand

A perfect storm: SA’s energy crisis & political blunders cause rapid devaluation of the Rand 768 513 Tamela

Persistent load shedding and the devaluing of the Rand threaten South Africa’s inflation trajectory, impeding economic growth and requiring urgent action to stabilise the currency and restore investor sentiment. These, together with geopolitical miscalculations, create a perfect storm alienating the country’s major trading partners.

The substantial Rand depreciation in recent months has fuelled higher inflation rates compared to that in a more stable currency environment. This depreciation has had a cascading effect on consumer prices: the upward pressure equally pressurising businesses and consumers.

The Council for Scientific and Industrial Research (CSIR) recently disclosed that power from generators can be up to 408% more expensive than power from the municipal grid. Because these costs are invariably passed on to customers, inflation is further intensified. According to estimates calculated by the SARB it is plausible to assume that load shedding could add an additional 0.5% to headline inflation during the remainder of 2023. Load shedding has placed severe strain on an already subdued economy. Not only has it added to costs and inflationary pressures; but it has also hampered economic growth, job creation, and investor confidence.

The concerns surrounding load shedding have taken a toll on investor sentiment, causing an increase in the country’s risk premium, and sparking a sell-off in the South African Rand and bonds. The weakened Rand in turn raises the cost of imported goods and further places pressure on the existing current account deficit.

Moreover, South Africa’s involvement with Russia on various fronts has been the topic of much debate and scrutiny. The Government has invited Putin to the BRICS Summit to be hosted in Johannesburg in August. But, with an international arrest warrant out for the Russian president, as a signatory to the Rome Statute and in line with the Supreme Court of Appeal and International Criminal Court findings following President Al Bashir’s visit in 2015, the country faces arresting Putin if he were to arrive in the country.

Additionally, the US has accused South Africa of supplying arms to Russia in a covert naval operation, escalating a foreign policy crisis for President Ramaphosa over South Africa’s ties to Russia and position on the war in Ukraine. The country’s graylisting further has added to the uncertainties surrounding the economy.

Whilst the SARB has adopted a contractionary monetary policy stance by gradually increasing interest rates, this is proving sluggish as a stance to combat inflation against the backdrop of geopolitical errors and the electricity crisis. Whilst this is usually a logical approach to combating demand-side inflation, the path to resolving these issues will require collaborative efforts from the public and private sector to stabilise the currency, mitigate load shedding, and restore investor sentiment. Failure to do so could prolong South Africa’s uphill battle with inflation and currency devaluation, further damaging the prospect of economic recovery.

The Rand has recovered in the last two weeks but remains volatile.

How can we help?

In this deteriorating macro-economic environment, Tamela can assist businesses navigate these uncertain times. Tamela can provide assistance in the context of debt refinancing or restructuring to offer reprieve in this high interest rate environment. 

For more information, please contact Nicholas Dunn on +27 722 284 298 or Nicholas@tamela.co.za

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