The South African currency’s exchange rate versus the U.S. dollar plunged to a new all-time low of ZAR19.51:US$1 on May 12, after the U.S. ambassador to South Africa accused the country of secretly supplying weapons to Russia. The rand’s depreciation by over 5% in just one week and more than 12% since the start of the year has raised concerns about the country’s economic stability.
U.S. ambassador Reuben Brigety alleged that Russia took possession of the weapons in late 2022, a claim that South African officials have quickly denied. The South African foreign affairs ministry summoned the U.S. official for a meeting on May 12, with spokesperson Clayson Monyela stating that his country has “no record of an approved arms sale by the state to Russia related to the period/incident in question.”
Dire consequences for South Africa
The South African rand’s depreciation could have severe economic consequences for the country, especially if the U.S. retaliates. Nolan Wapenaar, a co-chief investment officer of Anchor Capital, suggested that the U.S. government may respond by blocking South Africa’s access to American markets, which could lead to the loss of preferential duty-free market access under the African Growth and Opportunity Act (AGOA).
In addition, JP Morgan now expects South Africa’s gross domestic product (GDP) to contract by 0.2% in 2023, a significant downgrade from the previously projected 0.3% growth rate. The banking giant has also warned that its current account projection for the African country could worsen if the electricity situation is not resolved.
The situation has put the relationship between the United States and South Africa, a key partner in Africa, at risk. Despite South Africa’s neutral stance on the war in Ukraine, the Biden Administration hoped it could serve as a buffer against growing Russian and Chinese influence on the continent.
The South African government has reiterated its calls for a peaceful resolution to the conflict in Ukraine through diplomacy. However, recent displays of closeness to Russia have raised questions about the country’s neutrality. South Africa hosted Russian Foreign Minister Sergey Lavrov for talks in January and allowed Russian and Chinese warships to perform drills off its east coast in February.
The ongoing investigation into the allegations and the potential consequences for South Africa’s economy and international relations will continue to unfold. The outcome will likely impact the South African currency’s value.
