Rand seen below R8/$ this year

Johannesburg  - The rand is expected to firm more than 3% to R7.825/$ in 12 months, a Reuters poll showed, but that is dependent on a solution to Europe's debt crisis and a pickup in global growth this year.

The rand was one of the world's worst performing currencies last year, losing about 22% against the dollar as investors spooked by a spiralling crisis in Europe pulled out of riskier emerging markets.

The survey of 34 foreign exchange analysts and economists forecast the rand would weaken against the dollar to R8.335 in 3 months from about R8.18 on Thursday, recover to R8.215 in six months and climb back to R7.825 in a year.

The last survey had a more bullish strengthening trend for the coming 12 months than the current survey, R8.1 in three months, R8.0 in six months and R7.68 in 12 months.

“US dollar strength and rising risk aversion levels, on the worsening of the sovereign debt crisis, has weakened our rand forecast,” said Investec economist Annabel Bishop.

Analysts in the poll figured riskier assets would do better in the second half of the year, and so the rand, but noted that a further deterioration in the global macroeconomic outlook would easily change that.

“While the mining and manufacturing sectors should recover from the weakness experienced in 2011, headwinds from the global macroeconomic environment and rising cost pressures will restrain growth,” said John Cairns, at Rand Merchant Bank.

Mining and manufacturing growth slowed sharply in October. Total mining output contracted by 12.7% year-on-year (y/y) while growth in manufacturing output slowed to 1.0% y/y in the same period.

The contraction in mining output reflected weakness in South Africa's trading partners, with Europe the biggest partner.

The global backdrop is expected to determine where the rand trades. Some noted that a further widening of the current account deficit may restrain the rand's ability to recover.

“Worryingly, the bulk of the current account deficit is financed by ’hot’ money inflows,” Royal Bank of Scotland said in a client note, adding around $32bn has poured into the South African equity and bond markets in the last two years.

With the latest eurozone purchasing managers’ indices suggesting a mild recession in the region, the prospect of falling exports and possible capital outflows would weaken the rand.

That current account deficit widened to 3.8% of gross domestic product in the third quarter from 2.9% in the second quarter, partly due to large dividend payments to foreign investors.

The forecast for interest rates according to the latest Reuters Econometer is for rates to stay on hold at 5.5% while inflation averages 5.97% for the year, offering no immediate incentive to invest in the bond market.