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Undervalued rand could recover by end of 2016 – economist

Cape Town - There is a real possibility that the rand could strengthen against the US dollar by the end of this year, according to Colen Garrow, economist at Lefika Securities.

The rand has recovered somewhat from the historical lows it reached last year, although the currency is still considered undervalued.

Garrow prefers to use producer price inflation as a measurement of the value of the rand, as it is more reflective of the influence of commodity in the South African economy.

“If the rand would correct today it would come in at about R10 against the dollar,” Garrow said. He based his calculations on a data series of more than 30 years. “If you look at previous patches where the rand was undervalued it has always come back to fair value. There’s merit in looking at a stronger rand.”

Garrow is cautiously optimistic that the momentum of the negative news could start “winding down” – even if South Africa loses its investment-grade status next month when S&P will review the BBB- assessment, which is one notch above junk.

He points out that the discounting of the rand started in September already on the back of fears of credit downgrades. “From September last year to April this year we had net foreign outflows in equities of R83bn,” Garrow said.

In December 2015, credit ratings agency Fitch downgraded South Africa to one notch above junk status, while Standard & Poor's revised the outlook on South Africa to negative from stable.

“My own view is that maybe it’s time to start looking at another tipping point. There is still risk, but the bulk of the negative news is out of the way and political risk may start to dissipate with the election in August. And when the rand turns it will do so quite significantly,” Garrow said.

       
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