![The rand will reach new record lows against the dollar over the coming months](https://frontierview.wpengine.com/wp-content/uploads/2023/05/The-rand-will-reach-new-record-lows-against-the-dollar-over-the-coming-months-1024x465.webp)
Build contingency plans to cope with rand volatility, power shortages, and political uncertainty
Firms importing products should review their pricing cycles and strategies to cope with continued rand volatility. MNCs that struggle to raise prices because of customer price sensitivity should assess how they can cut costs to protect margins, for example, by automating processes to improve efficiencies. All firms should invest in backup power to ensure business continuity while concurrently planning for weak demand for nonessential products as customers themselves prioritize investments in expensive backup power. MNCs should develop scenario and contingency plans to cope with potential commercial disruption caused by prospects of worsening load shedding or the imposition of Western commercial sanctions on South Africa.
Overview
Multiple converging detractors have darkened South Africa’s economic outlook and increased risks of commercial disruption for MNCs.
- In February, electricity generated by Eskom, the state-owned electricity utility, fell to the lowest level since 1996. This has caused worsening electricity shortages that are hobbling the country’s large industrial base and causing consumer sentiment to weaken.
- Allegations by the US that South Africa is supplying Russia with arms pushed the rand to a new record low against the dollar on May 12.
- Investor anxiety over the country’s political future is mounting because of prospects that the governing ANC party—which has been in power for 29 years—will fail to win the May 2024 elections.
Our View
MNCs should plan for a series of risks that will affect their ability to achieve their commercial targets over the coming 12 months.
- The rand depreciates to beyond 21 per US dollar by Q4 2023 – 75% likelihood: Gloomy economic data, worsening load shedding, revelations around South Africa’s relationship with Russia, and prospects of a shaky coalition government being elected in 2024 will contribute to further depreciation and volatility of the rand. The South African Reserve Bank (SARB) will intermittently raise interest rates, temporarily halting the rand’s slide, but the currency is expected to reach new record lows by the end of 2023.
- Power cuts for up to 24 hours occur during winter 2023 – 60% likelihood: To protect the national electricity grid from a catastrophic collapse amid declining electricity output, Eskom will gradually expand load shedding as demand rises during winter. Load shedding will progressively affect previously exempt organizations (including hospitals and large industrial facilities), while households and businesses face the prospect of periodic 24-hour-long power cuts with little notice. This would cause consumer sentiment to weaken, industrial and mining output to drop, and service activity to be progressively disrupted. This will also aggravate inflation as businesses are forced to raise prices to cover expensive backup power costs.
- Western sanctions are imposed on South Africa over its ties with Russia before the end of 2023 – 50% likelihood: If concrete evidence emerges that South Africa is supplying Russia with arms, South Africa will be promptly ejected from AGOA (the US’s preferential trading scheme), and narrowly targeted sanctions on high-ranking government and military officials would be applied. This would cause the rand to slump to a new record low and pressure the SARB to sharply raise interest rates, causing limited but notable economic pain. A lower likelihood (but still possible) scenario would involve broader commercial sanctions targeting South Africa’s exports or its large financial service industry. Such sanctions would induce a sharp recession, cause the rand’s value to crater, and trigger a slump in tourist arrivals.
- Investor and consumer sentiments slump ahead of the May 2024 elections – 30% likelihood: Prospects of a fragile coalition government forming after the elections will likely cause domestic Consumer sentiment in, and foreign investor confidence toward, South Africa to soften—but not slump—as the vote draws near. However, if it becomes increasingly likely that a hard-left coalition government will be formed (for example, including the Economic Freedom Fighters as a leading member of a coalition), consumer spending and investment toward South Africa could dip sharply. In the subsequent months, the emigration of high-skilled workers would accelerate.
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