South Africa is at a tipping point

South Africa’s currency, the rand, has fallen to record lows, with fears of it reaching R20 per dollar as investors are concerned about the restrictive monetary policy, a severe power crisis, and political errors exacerbating the already weak economy.

This comes after the South African Reserve Bank raised its policy rate to the highest in two decades in an effort to control inflation.

This move, however, is expected to strain an economy already projected to grow just 0.3% this year. Factors such as falling commodity prices, a slowdown in China, and a diplomatic dispute with the US over South Africa’s relations with Russia also affect the economy. The central bank blamed rising prices largely on the government, with high administered and regulated prices, such as electricity and water.

Markets are pricing in another 75 basis points of rate hikes by year-end. Ongoing power cuts, slow plans for debt alleviation, and renewable energy implementation further add to the problems.

All these issues are leading to slowing growth, potentially complicating the government’s efforts to consolidate debt and reduce the fiscal deficit.

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