Morning Brief – The same old problem

Charles Porter
Thu 9 Feb 2023

The same old problem

The continuous evolution of and speculation over the peak of Federal Reserve interest rates has continued to wreak havoc upon emerging market currencies and assets. Due to the preeminence of the Federal Reserve, it can frequently be read as a proxy for global rates. As we have spoken about recently, the FOMC has shown its cards but economic data continues to create volatility in US-rate exposed markets. Emerging market currencies have trended higher during and following the last Federal Reserve decision. However, since the stellar labour market statistics were released last week, there has been continued volatility within emerging market currencies and rate expectations adjust.

Despite the significant price pressures brought to emerging market currencies in general, for South Africa’s Rand there is an all too familiar cause for weakness. That is in the form of Eskom, the state owned utility provider that has undermined confidence in the nation for decades. The failure of Eskom to provide sufficient power for the nation whether it be as a result of insufficient fuel or failing infrastructure has provided a hindrance to growth and consumption. However, Eskom has served to be more than just a face value hindrance to growth. The blackouts caused by load shedding have cast such a great shadow that it has become a beacon of governmental failure. Eskom’s symbol is also morphing it seems.

If you ask many South Africans what Eskom represents to them, they would argue it is not just a symbol of failure but a symbol of corruption. That view has often been nurtured by frustration, however, that view is now becoming more widespread and international. Late last year there was an apparent attempt to assassinate the then-head of the failing state utility provider. André de Ruyter, who subsequently resigned citing political pressure (swiftly followed by alleged cyanide positing), had been vocal about the corruption within the company. He cited examples of organised crime swapping out supplies of coal destined for under-fuelled power stations and the contents replaced with rocks. The attention cast upon the company and therefore nation by these accounts and the subsequent assassination attempt could be sufficient to place the Rand at the bottom of the pile of the already beleaguered emerging market currencies. If emerging market currencies continue to suffer amidst raising US rate expectations, the Rand could be one of the biggest losers. 

Discussion and Analysis by Charles Porter

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