Military advances and economic sanctions during the ongoing war in Ukraine are key factors that will impact the volatility of the rand in coming months, economists have warned.
PwC’s South Africa Economic Outlook Updated Macro Scenarios for 2022-2023, released on Thursday, highlighted three possible scenarios for the direction of the rand/US dollar exchange rate.
The report noted that the rand had traded broadly stronger during the first quarter of 2022, appreciating from R16.00/$ at the start of the year to R14.40/$ at the end of March. Several factors buoyed the rand, including reduced travel bans and easing lockdown restrictions, a strong global growth outlook before the Russian invasion of Ukraine, and higher commodity prices following supply chain disruptions caused by the invasion.
The rand traded weaker during the second quarter, depreciating at times to above R16.00/$ in May and June. Factors pressuring the rand included risk-off sentiment due to the fallout from the Ukraine war, a sharp rise in US interest rates supporting the dollar, and domestic economic challenges like load-shedding and flooding in KwaZulu-Natal.
“The key international factor currently driving global financial markets is the fallout from the Russian invasion of Ukraine. The two countries are significant players in the world food and energy markets, accounting for 70% of global sunflower exports, a third of potassic fertiliser exports, a quarter of wheat exports, and 12% of crude oil shipments,” the PwC report noted.
Ukraine is home to a quarter of the world’s super-fertile chernozem (black) soil and exports enough food annually to feed 400 million people.
“Unsurprisingly, commodity prices have spiked in recent months. The S&P GSCI Commodity Index (consisting of 24 commodities across energy products, industrial metals, agricultural products, livestock and precious metals) is currently 65% higher in rand terms compared to a year ago. As such, the outlook on the disruption in Central and Eastern Europe is key to the outlook on financial markets and the rand,” the economists said.
Under PwC’s baseline scenario (50% probability), the European Union (EU) and North Atlantic Treaty Organisation (Nato) countries are not directly drawn into the conflict. However, they continue to provide indirect military assistance to Ukraine, such as defensive weapons and ammunition, intelligence, and other forms of military aid. Current sanctions imposed on Russia remain in place and no further significant sanctions are imposed. From a military perspective, the Russian military advance largely stalls, and a possible stalemate sees the conflict continuing for some time.
“Under this scenario, as the associated impacts on global markets, we expect the rand to average R15.50/$ this year and R16.05/$ in 2023,” the economists said.
PwC’s downside scenario (the second most likely scenario, with a 30% probability) contains the same outlook for EU and Nato involvement. However, from a military perspective, the Russian military advance continues from the current situation in the east of Ukraine. In response, Russia is ejected from the World Trade Organization (WTO) and all the country’s banks are cut off from the SWIFT global payments messaging network. The US and EU stop importing the vast majority of Russian natural gas, and some of this demand is replenished by supplies from Saudi Arabia, the US, Qatar, and Azerbaijan.
“Overall, this is a deteriorated situation from the present and promises to disrupt global commodity markets with greater intensity over a longer period. It is possible that the oil price, which in early June touched $130/barrel, increases to $150/barrel. Under this scenario, and the associated impacts on global financial markets, we expect the rand to average R15.97/$ this year and R16.69/$ in 2023,” PwC said.
PwC’s upside scenario, which is least likely, with a 20% probability, assumes a diplomatic resolution that significantly reduces military conflict in Ukraine and allows the resumption of a meaningful volume of the country’s soft commodity exports.
“Under this scenario, as the associated positive impacts on global markets, we expect the rand to average R15.04/$ this year and R15.41/$ in 2023,” the economists said.
