Brace Yourself for More Power Cuts

About 95% of South Africa’s power is generated by Eskom and it has warned that we need to brace ourselves for more frequent power cuts as it stops the rescheduling of planned maintenance. This also means that the rand took a hit and weakened. 

Andre de Ruyter, who at the beginning of the year took over as Eskom’s chief executive officer said that we need to, unfortunately, expect an increase in load shedding as we need to give ourselves the space to fix what needs to be fixed. 

Since late 2005, South Africa has been facing an energy deficit due to the ageing plants, the failure to keep pace with demand and the government stalling on giving the go ahead to invest in new capacity. 

The finances of Eskom are also in dire straits with over R450 billion of debt and it isn’t able to generate enough income to cover its costs, which has left it reliant on bailouts. As it refinances debt the utility expects a rise in interest costs.

According to the Council of Scientific and Industrial Research, power cuts reached 6000 megawatts late last year and last year alone may have trimmed about R118 billion from the GDP.

After, De Ruyter issued his warning about more outages, the rand continued its decline.

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As Load Shedding and the Coronavirus Hit, here is Where the Rand Could End Up

In early trade on Monday 3rdFebruary, the rand was on the back foot and for the first time in 2020, it broke the R15/dollar threshold. 

In January, following the South African Reserve Bank and International Monetary Fund (IMF) downgrading their growth predictions, the South African rand came under pressure. Last week, the rand continued to slide due panic about the coronavirus spreading, which led to the sell off of emerging market assets. 

Treasury partner at Peregrine Treasury Solutions, Bianca Botes said that as investors are trying to calculate the economic impact of the virus, many emerging markets are coming under pressure, whilst the death toll continues to rise. 

On top of the virus, rolling blackouts by Eskom will be continuing until Thursday, which has also played its part on the rand. 

As the fiscal situation continues to decline which is fuelled by the continued SOE bailouts, the IMF has sternly warned the government. She also said that the rand is expected to test a sustained break above R15.00.

The Rand is Vulnerable

The rand is vulnerable and the recent sell-off shows how vulnerable it is to both local and international shocks. The fiscal and growth of the country is still a concern said, Nedbank analysts. They also said that after the FED held its course at its Federal Open Market Committee meeting, they will be standing by their mid-year target of R16/dollar. The SARB, on the other hand, turned more dovish at its last MPC meeting. 

Nedbank analysts do believe that the rand could recover some ground once the equity markets become comfortable with the potential coronavirus pandemic. 

Absa’s views are similar with them predicting that the rand will likely weaken back up to R15.16/dollar by the end of the first quarter and by year end it will reach R16.13. Absa also believes that due to capital outflows in the first half of the year, the rand will continue to be vulnerable as it is expected that Moody’s will downgrade South Africa rating in March. This will then result in the South African Government Bonds being ejected from the World Government Bond Index. 

In the first half of 2020, JP Morgan is expected to reduce South Africa’s bond weighting even further within its emerging market bond index, which is putting extra weight on the rand. 

According to Absa, all these factors could actually weaken the rand more than what is expected. Policy rates could be cut more by SARB and economy could end up back in recession. 

Bank of America is relatively bullish on the local currency and are predicting trade at R14.85 over the next 12 months. 

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