LEON Myburgh, a Johannesburg-based bonds and currency strategist at Citigroup, who has been predicting a slide in the rand since August, says the unit is likely to continue declining over the next two months.
Myburgh predicts the rand will trade at between R9.25 and R9.50 to the dollar by the end of the first quarter before stabilising at around R9.25 for the remainder of the year.
“The rand is the only emerging market currency to have lost ground against the pound this year, which makes it a significant underperformer,” says Myburgh.
“It’s symptomatic of socio-political concerns about SA in the minds of foreign investors and our inability to grow exports due to labour unrest, low productivity and high electricity prices among others.”
The reason Myburgh expects the rand to stabilise at around R9.25 is because he says the weakness in the currency will dampen local consumer demand for imported products, thereby taking pressure off the current account deficit, which reached 6.4% of gross domestic product in the third quarter.
Myburgh says that given the constraints on SA’s economy such as low labour productivity, declining mining output and weak demand in the eurozone, which is the country’s biggest trading partner, the only way the current account deficit can be moderated is through a drop in imports.
“The release valve for the current account will be the rand,” he says.
The major handicap of running a shortfall on the nation’s current account, a broad measure of trade in goods and services, is that it leaves the country at the mercy of foreign capital inflows, particularly short-term foreign purchases of SA bonds and equities.
Although foreign investors have purchased a net R2.04bn in bonds and equities so far this year, following on the R83.8bn purchased in 2012, further deterioration in the outlook for economic growth and inflation could cause offshore investors to dump local assets.
If that happens, the rand would most certainly weaken further.
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