Johannesburg - After posting one of the strongest rallies in emerging markets this year, the rand is headed for a 12% drop in 2017, according to analysts polled by Bloomberg. Deutsche Bank says they’ve got it wrong.
The fourth-biggest foreign-exchange trader is shrugging off political uncertainty that’s slowed the currency’s advance in 2016, predicting a gain of about 7% to R12.50 per dollar next year. Here’s why:
1. Inflation outlook
Inflation is slowing. The South African Reserve Bank sees the rise in consumer prices averaging 5.8% in 2017, down from a seven year high of 7% in February. That means the yield on South African assets will remain attractive, even as US interest rates rise, Deutsche Bank economist Danelee Masia said in a report on December 5.
2. Economy rebounding
South Africa’s economy barely avoided a recession in 2016, but things are looking up. Growth should accelerate to 1.4% in 2017, more than the central bank’s estimate of 1.2%, as companies rebuild profit margins through a combination of cost efficiencies, job cuts and wage restraint, according to Deutsche Bank. A rebound in agriculture following the worst drought in more than 100 years may also fuel growth.
3. Current-account gap
The rand’s Achilles’ heel, the current-account deficit, is narrowing as subdued demand constrains imports. The shortfall shrank to 3.1% of gross domestic product in the second quarter, from 5.3% the previous three months. Deutsche Bank predicts it will decline to the smallest margin in six years in 2017, making the rand less vulnerable to capital outflows as the US lifts interest rates. Third-quarter current-account data is due Friday.
The rand declined 1.4% on Thursday to R13.6604 per dollar. Rand Merchant Bank, the second most-accurate dollar forecaster in the third quarter according to Bloomberg rankings, predicts the currency will strengthen to R13 by the end of 2017. The top rand forecaster, Swissquote Bank, sees the currency at R14.70, while third-placed ABN Amro Bank sees a drop to R15.25.