There are fears that US charges that South Africa loaded arms onto a Russian cargo ship in Simon’s Town in December — a potential sanctions-busting move — could lead to a huge sell-off of assets by foreigners, triggering a liquidity crisis.
Tensions with the US added a layer of uncertainty to an already difficult market environment and could spark stronger responses from the South African Reserve Bank, according to economists.
The market had been fragile leading into the week in which the rand weakened to its worst level on record, with rolling blackouts negatively affecting sentiment.
Bonds and equities, along with the rand, experienced aggressive sell-offs in a week when other emerging market economies made gains.
Annabel Bishop, Investec chief economist, said on Friday sentiment towards South Africa has taken a nosedive, as seen in a snowballing asset sell-off.
“The majority of financial market players are in the West, which has taken a strong stand against the Russian-Ukrainian war, and are showing displeasure about the [arms supply reports] through a rand sell-off,” Bishop said.
The rand slid to R19.52 against the dollar this week and is expected to tumble further as the fallout deepens.
“The reports added to a slew of bad news, including escalating electricity outages and the negative effects these are having on economic growth and the health of state finances. The risk of South Africa being seen to, or actually, collaborating with Russia should not be underestimated, with further substantial rand weaknesses likely if South Africa is proven to have done so, which will heighten inflation as the cost of living rises sharply,” Bishop said.
If the news flow did not improve markets would remain jittery, which could force an aggressive rate hike in two weeks, according to Mamokete Lijane, a global markets strategist at Standard Bank Corporate & Investment Bank.
The diplomatic tensions added “another layer of uncertainty” to South Africa’s long-term concerns.
RMB chief economist Isaah Mhlanga said a minimum rate hike of 25 basis points had already been “guaranteed” before the diplomatic row.
The scheduled rates announcement is on May 25.
“When politics does not work, institutions like the Bank have to provide stability,” he said.
Trade relations are also hanging in the balance as market watchers predict South Africa’s pro-Russia stance could lead to the country’s exclusion from preferential access to US markets via the Africa Growth & Opportunity Act (Agoa).
The risk of SA being seen to, or actually, collaborating with Russia should not be underestimated, with further substantial rand weaknesses likely if SA is proven to have done so which will heighten inflation as the cost of living rises sharply
— Annabel Bishop, Investec chief economist
The US is South Africa’s second-largest trading partner, with bilateral trade now at about R400bn.
South African citrus exports, for example, have found a lucrative market in the US, growing from small volumes to about 100,000t annually. The automotive sector, the biggest beneficiary of Agoa, would also suffer.
There are already calls in the House of Representatives for South Africa to be excluded from Agoa.
Republican congressman John James of Michigan has introduced a resolution in the house denouncing the military exercises that South Africa hosted with Russia and China.
Backed by five other Republican lawmakers, the resolution has been referred to the house committee on foreign affairs.
Diplomatic sources said South African help for Russia, and the ANC’s negative posture towards the US, would make it difficult to argue for the country’s continued participation in Agoa.
In resolutions emanating from its elective conference in December, the ANC blamed Russia’s invasion of Ukraine on the US. This has irked many in Washington who believe the criticism is absurd and doesn’t acknowledge financial support the US provides through the President’s Emergency Plan for Aids Relief and the benefits accrued via Agoa.
“Any country participating in Agoa cannot take actions contrary to the security of the US,” one diplomat said.
Donald MacKay, CEO and founder of XA Global Trade Advisors, said South Africa was in a perilous position and could lose its Agoa benefits when the legislation comes up for review in 2025.
“My immediate fear is we can get placed into an out-of-cycle review with the risk of losing benefits and it could happen sooner; the US doesn't have to wait [for 2025]. It can use its discretion to reconsider our benefits.
“If the benefits are suspended or withdrawn, the most impacted industry will be the automotive because it is the biggest beneficiary of Agoa. By a long stretch the automotive sector will be the biggest loser if something goes wrong,” he said.
MacKay noted that the UK and the EU were “already unhappy with us”.
“The EU is unlikely to suspend any benefits or trade but it's more likely that issues around the deciduous fruit industry trade with the region may take longer to get resolved.”
Business Day reported in February that the Citrus Growers Association of South Africa had asked for government assistance in dealing with EU cold-treatment regulations, which it said could ruin the R30bn export industry.
New EU rules require imports of citrus fruit to undergo cold treatment processes and pre-cooling steps for up to 25 days before consignments are shipped.
“If South African industries lose their space in the EU, they will be replaced and it will be hard to get back in when new supply chains are established. We need to ensure this doesn't happen,” MacKay said.
The EU, the UK and the US account for 36% of South Africa’s total exports. “This is enormous. We cannot risk losing that.”
He said there was a “weird obsession” with Brics but trade between South Africa and countries in the group other than China was generally minimal, with Russia accounting for less than 0.5%.
Business Unity South Africa (Busa) urged the government to come clean on whether it shipped arms to Russia as the fall of the rand against the dollar indicated how seriously the markets consider the allegation, made by US ambassador Reuben Brigety.
Busa said the US was South Africa’s second-biggest trading partner after China.
“It is extremely important for us to maintain good relations with the US, as it is in our interests to maintain good relationships with China and other major trading partners.
“We appeal to President Ramaphosa to provide urgent clarity and certainty on these allegations. We note the announcement by the Presidency that a judicial commission of inquiry will be appointed to investigate these allegations, but believe our country needs clear answers now, not in a few months,” said Busa CEO Cas Coovadia.
He said Busa had always held the view that positions adopted by the government must promote and not inhibit growth. But the response by the markets to Brigety’s allegations demonstrated that South Africa was achieving the opposite of making the country attractive to investors.
“Ordinarily, we do not concern ourselves with geopolitical issues and South Africa's position on its foreign relations. However, we are concerned that the foreign policy stance of the South African government is having a negative impact on the economy and inhibits our ability, as a country, to address the socioeconomic crises we face,” Coovavdia added.
On Friday evening, AFP reported that President Vladimir Putin and Ramaphosa had agreed to deepen ties.
The two "expressed their intentions to further intensify mutually beneficial ties in various fields," the Kremlin said in a statement.
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