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Rand’s weakness stems from more than loadshedding

06 July 2022 Citadel Global
Bianca Botes, Director at Citadel Global

Bianca Botes, Director at Citadel Global

With South Africans learning to live with the current cycle of stage 6 loadshedding, many believe the ongoing power cuts to be the antagonist behind the weak rand. However, according to treasury experts, loadshedding is merely a small contributor to a far greater picture.

Bianca Botes, Director at Citadel Global, explains that although loadshedding negatively affects economic growth and sentiment, the weak performance of the rand stems from numerous factors; so, Eskom simply switching the lights back on will not result in a significant rebound.

FOUR CONTRIBUTORS TO THE WEAK RAND:

1. THE GLOBAL ENVIRONMENT

The global environment is the key contributor to the weak rand, which is affected by geo-political events such as the Russia-Ukraine war, as well as international inflation and interest rate hikes.

Central banks around the world are looking to rein in inflation to prevent the significant economic damage that comes with long-term higher levels of inflation. This is why interest rates are watched so closely.

2. THE RISK OF RECESSION

Taking a lesson from history, one can conclude that a recession is almost always preceded by a period of tightening monetary policy (rising interest rates, for example) and fiscal contraction (less government spending, higher taxes, or both) and often higher energy prices.

The increasing risk of a recession is dampening appetite for risk assets, such as the rand and other emerging market currencies, and assets denominated in these currencies.

3. INVESTORS LOOKING TO ‘SAFE HAVENS’

During times of low sentiment, high risk and economic uncertainty, investors are flocking to ‘safe haven’ assets. Gold, which is usually considered to be a ‘safe haven’ asset, is not as attractive to investors due to the surge in interest rates and high yields offered by United States (US) treasuries.

4. FLOCKING TO THE STRONG DOLLAR

The dollar has surged to 20 year high against the euro, and is now investor’s ‘safe haven’ asset of choice. Emerging market currencies, including the rand, will therefore feel the pinch of the rising dollar: the stronger the dollar, the more rands are required to buy a dollar.

HOW BUSINESSES CAN ADAPT RIGHT NOW:

It is wise for businesses to consider a good, comprehensive cash management strategy to ensure their company’s cash earns more interest than it would simply sitting in a business’s current account, where interest is typically close to zero.

Just as your business is unique and adaptable, your cash needs should be too. Seek out a partner who will create a bespoke cash management solution specific to your business’s ongoing needs.

Use this time of volatility and rising interest rates to leverage cash management strategies to the benefit of your business.

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