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Coming when it was least expected, the rand’s strength, should it last, is surprisingly good news for South Africans.
At current levels – which reflect a marked appreciation of the rand since Nenegate in December – it is likely that interest rate and inflation increases will be muted, putting more money into people’s pockets in the months leading up to Christmas.
The rand was at R13.20 to the dollar on 10 August, its best level this year and far off the 11 January exchange rate trough of over R18. The rand, which slumped to R15.44 directly after President Jacob Zuma fired finance minister Nhlanhla Nene on 9 December, continued to languish thereafter.
But since mid-June, when it was at R15, it has strengthened and for the past month has shown consecutive weekly increases to its current level of R13.30 (at the time of writing on 15 August).
Its relative strength to the British pound, which had itself weakened against the dollar, has been even more impressive. The rand is at R17 to the pound against R24.50 on 11 January.
Although driven largely by external factors including better risk appetite for emerging-market currencies, uncertainty over whether the US Federal Reserve will push up interest rates and central bank conservatism globally, markets have acted as though there is cause for some optimism in the South African economy despite the looming downgrade by ratings agencies to junk status.
The local election results were largely considered positive in the eyes of traders, mining and manufacturing production figures were better than expected and the petrol price has been coming down.
All in all, some good news for the currency.
Ratings downgrade?
There is, however, still political and economic risk, as ratings agencies are well aware, and the good news may not be enough to stave off a ratings downgrade, which may or may not be already built into the exchange rate.
Standard Bank chief economist Goolam Ballim says the recent appreciation of the rand has taken place alongside dollar strength.
“This is seemingly odd in that it is usually the case that the rand acts inversely to the dollar. Nonetheless, in the face of dollar strength, the rand appreciation signals the extent to which it was initially oversold and detached from fundamentals, precarious as they may be.”
Ballim says the Fed’s approach to monetary policy, combined with some stability in China’s growth rate (which is underpinning commodity prices) “provided favourable external headwinds for the rand, which is categorised as both an emerging- markets and commodities currency.
Locally, the elections have added a favourable glow to financial markets, including the rand,” he says, as markets have judged the process free and fair and absent of taint, and the outcome positive for improved governance.
But, “having said this, it is likely there will be reduced additional good news to carry the rand even further over the near term and we would look for some element of consolidation following its brisk appreciation in just one month”.
The risk of a sovereign downgrade by Standard & Poor’s still looms heavily, he says, and economic data and political events will still unfold prior to the first week in December, when South Africa will know if it is downgraded below investment grade.
Ballim says that “to the extent that the political climate continues to show incremental reformist gains and, critically, that finance minister Pravin Gordhan remains at the helm of Treasury” and that it is insulated from bad intent, SA should again avert a downgrade.
Outlook for the rand
In a report on the rand, Nomura analyst Peter Attard Montalto says it “looks set to remain a lot stronger than forecast for longer until domestic idiosyncrasies come to the surface – either on their own or from a change in the global backdrop”.
Nomura has lowered its forecast from R19 to R17 to the dollar at year-end and R18 at end-2017.
However, Nomura still believes asset prices (including the currency and local rates) “currently markedly underestimate the political risk premia required into year-end”, and that ratings downgrades still look likely.
Montalto says investors are becoming more bearish after Zuma’s position is seen as secure. Nomura’s view on rates, inflation and the high current account deficit have not changed but domestic shocks will be muted as international investors increase their appetite for risk and look for yield in emerging markets.
Nomura expects the rand to be R17 at year-end, R18 at end-2017 and R16 at end-2018, including an expectation of a downgrade at the end of this year. In the short term it expects the rand at between R14 and R15.
Some issues which would cause Montalto to revise his forecast are a major cabinet reshuffle “which could raise the risks of immediate downgrades by the ratings agencies”, a loosening of fiscal policy, a China crisis, a Donald Trump presidency and extra Fed hikes.
Nedbank Group economist Busisiwe Radebe says the rand is going with the emerging-market currencies flow, as well as responding to US job numbers. These, together with some positive signs locally, have given the exchange rate a boost, she says. “The major drivers have been what is going on internationally rather than what is going on here.”
The stronger currency, if it is sustained, is positive for inflation and interest rates, which are rand-dependent.
Radebe mentions that a ratings downgrade at the end of the year will not necessarily mean a weakening rand. “If you look at the Brazilian real, after the downgrade, it actually strengthened as the downgrade was expected.”
Nedbank’s average for the rand/dollar exchange rate is R15.06 for the 2016 year. Its forecasts suggest R15.41 in 2017 and R15.97 in 2018.
Although the rand is showing strength at the moment and although Nedbank is not expecting any sharp deterioration, Radebe does point out that the 2015 average was R12.93.
This article originally appeared in the 25 August edition of finweek. Buy and download the magazine here.
