SOME market watchers were surprised when the rand didn't react negatively to the news that corruption charges against ANC president Jacob Zuma were to be dropped. But the rand's continued stability should come as no surprise at all.
Foreign investors and speculators prize political stability above all else in emerging markets. They value it above justice and even democracy - and the Zuma decision is seen as taking away the danger of political instability.
The political stability issue will also come to the fore regarding SA's elections later in April, and Zuma's choice of cabinet once he is president of the country. Then, of course, the million dollar question is whether Finance Minister Trevor Manuel will stay on in his job.
It's important to note that the ANC, in its election pledges, has stuck to the three-year rolling budget drawn up by Manuel and unveiled in February. Some of the wilder ideas initially expressed fell by the wayside when it came to costing them.
As long as the three-year rolling budget sets the ANC's course, it won't matter if there's a new finance minister. (That doesn't mean there can't be deviations from the rolling budget; these will probably be inevitable because the economy is likely to go into recession.)
In an era of massive fiscal deficits in the rich countries - more than 13% of gross domestic product (GDP) in the US - SA's budgeted deficit of 3.8% looks prudent. Even if that is exceeded, there will be no cause for panic among foreign investors and no reason to sell off the rand.
Greenback mood swings
The rand recently flirted with the R9 per dollar level - a far cry from the weakest level of R11.85 when things were at their worst in October.
The recent, relatively robust rand mainly reflected a weaker dollar. The US unit softened sharply because of massive money-printing by the Federal Reserve, as well as a tentative return to some risk appetite after months of extreme risk-aversion.
The dollar's exchange rate has yo-yoed as the world veers between panic and calm. The greenback appreciated during periods of risk aversion - with the unit rising to $1.25/euro from about $1.40 which prevailed before crisis struck the global economy.
But then risk aversion receded, and the dollar again weakened quickly to about $1.37/euro. However, the ping-pong game on international markets continued, and the dollar was at about $1.338/euro at the time of writing.
The world is experiencing mood swings and the dollar along with it.
But the dollar isn't the only factor affecting the rand. SA's balance of payments (BoP), which remains pretty vulnerable, is a factor that can't be ignored. While the current account deficit improved markedly in the fourth quarter of 2008 to 5.8% of GDP, it is still uncomfortably high.
The important point about the current account deficit is that it has to be financed by inflows of foreign capital. If the shortfall on the current account - which is the trade balance less net payments for services and income - isn't fully financed, the currency has to weaken.
A worrying aspect of SA's BoP is that virtually all of the R39bn net inflow of capital into SA in the fourth quarter of 2008 was unidentified. This means no one is sure where the capital SA is relying on comes from.
Bullish rand sentiment
Even so, some economists are bullish on the rand, based on different fundamentals. Brait economist Colen Garrow does a purchasing power parity (PPP) calculation which finds the rand should be at R7.08/$.
PPP is best explained by using the example of the big Mac index: "true" exchange rates are calculated on the basis that the same product - a big Mac - should cost the same, no matter where it's produced.
Garrow also looks at the real effective exchange rate (REER), which is the rand against a basket of currencies adjusted for inflation. Based on the REER, he also finds that the rand is undervalued.
Garrow says: "All things remaining equal, a trend towards R8.50/$ seems intact, with an outside chance that further gains may be extended towards R7.50." Garrow acknowledges that this view is more bullish than the consensus.
Rand Merchant Bank currency strategist John Cairns has revised his mid-year forecast for the rand to R10/$ from R10.50, to reflect recent moves in the euro.
However, he retains a year-end forecast of R10.50, arguing that the dollar's moves against the euro are the key to rand performance.
Former US Federal Reserve chairperson Alan Greenspan once said that forecasting exchange rates is akin to tossing a coin. But it has to be done. I agree that the dollar's movements hold the key. But will the dollar be as weak as some commentators hope?
- Fin24.com