South Africa’s volatile currency is currently trading at R17.22/$ and is on track to average just under R17/$ for the third quarter of the year, says financial services provider Investec.
It reports that high levels of uncertainty continue to plague financial markets, with a second wave of Covid-19 cases globally unsettling market sentiment in what was anticipated to be the period in which Covid-19, and its economic impacts, wane.
While the global economy is not expected to see a second recession this year, or marked lockdowns on economic activity, Investec notes that the risk sentiment has dulled and the resultant dollar strength has driven the rand weaker.
“The rand is experiencing jumpy trade [on September 28] in thin conditions, attempting briefly to pierce R17/$, before retreating to R17.22/$, conflicted also by concerns over the US Presidential elections and South Africa’s weak fiscal and macroeconomic environment.”
It is for this reason that Investec believes the domestic currency is likely to remain highly volatile, particularly ahead of the US elections, while high and rising Covid-19 infections globally have resulted in a new peak, or second wave, and this will likely continue to cause jitters until it subsides, Investec states.
The rand is, however, expected to resume its strengthening trend this year as the second wave of global Covid-19 infections collapses, which is unlikely before the fourth quarter, and this could provide some underpin of rand weakness this week, the company adds.
“The domestic currency is highly volatile overall and, while it is on a weakening bout currently, it can just as easily see a sharp swing stronger as well, as market sentiment improves,” Investec notes, adding that it still expects some strength towards year-end, after Finance Minister Tito Mboweni delivers his Medium Term Budget Policy Statement.
The domestic currency will continue to be limited in its gains on South Africa’s weak economic fundamentals and likely further credit rating downgrades, says Investec, although some good news has occurred with government finally implementing part of 2019’s Integrated Resource Plan, it adds.
South Africa’s government has now gazetted the Ministerial determination for the procurement of an extra 11 800 MW of electricity from independent power producers, to add to the current daily availability of around 30 000 MW that South Africa has been reduced to.
“The country has seen a downward spiral in economic growth over most of the past decade, as electricity availability has diminished, corruption proliferated and governance deteriorated, although improvements have recently occurred with President Cyril Ramaphosa,” Investec comments.
However, the company adds that the switch to allowing the additional procurement of power marks a key point for the future recovery of the economy, which has been damaged by an overburdened State-owned entity portfolio and difficulty in meet the country’s electricity needs, impeding the country’s ease of doing business.
The State has announced that “(t)his new energy will be procured from diverse sources, including solar, wind, gas, coal and storage”, and that “the procurement of power from independent producers will significantly increase investment in the sector”.
“Most importantly, at a time when energy supply is severely constrained, new generation projects that can be connected to the grid as soon as possible will be prioritised”, while restrictions to projects under 1 MW for self-generation projects have been removed, Investec states.
The next step, which will be following soon, is to initiate various procurement bidding windows including opening Bid Window 5 of the Renewable Energy Independent Power Producer Procurement Programme.
These reforms, if efficiently implemented, will improve the ease of doing business, says Investec, and with it bring economic growth especially if other regulatory blockages, complexities and onerous burdens are unlocked across the primary and secondary sectors of the economy.