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The local currency could reach R12 against the US dollar in 2019 and see increased stability over the next few years if economic growth improves to 3% and beyond, according to Old Mutual.
"A good ANC election outcome and policy reform would lead to a stronger rand, based on improved confidence," head of economic research Johann Els said at an investment media briefing on Tuesday.
The rand has experienced a volatile year, improving in the first quarter, following the election of President Cyril Ramaphosa and sliding among other emerging markets in July/August. The local currency is around the 16th most heavily traded in the world, and due to the liquidity of South Africa’s relatively deep financial markets is sensitive to global events and investor sentiment.
Investment bank Goldman Sachs said in September that the rand was undervalued and could reach 11/$ if the conditions were right to gain equilibrium.
Commenting on SA exiting the recession on Tuesday, with 2.2% growth in the third quarter of the year, Els said the country was on track for below 1% growth this year and 2% in 2019.
"Consumer fundamentals aren’t currently that bad and are likely to improve as confidence improves, as well as being in line with cyclical economic pickup. In addition, investment could rise sharply again, leading to growth possibly reaching 3 to 3.5 percent by 2021/2022," he said.
Els predicts inflation of 4.8% in 2019. Following the rate hike of 25 basis points (quarter of a percentage point) by the SA Reserve Bank in November, he foresees borrowing rates being increased just one further time in 2019.
Holding breath for elections
While Els believes there have been many positive developments this year, including the commission of inquiry into State Capture and Cabinet reshuffles, he maintains the outcome of the 2019 general elections will be crucial to determining the country’s path.
"We believe the ANC is on track for a comfortable win and, as such, expect more decisive moves to materialise after the elections, all of which will contribute towards the strengthening of confidence levels across the country," Els said.
Head of MacroSolutions at Old Mutual, Peter Brooke, warned that the biggest risk in the near future would lie in state-owned enterprises (SOEs) such as Eskom, where government’s contingent liabilities (state-backed guarantees) could soon become actual liabilities if the power utility were insolvent.
Brooke believes the best option would be to sell private equity stakes or exit some SOEs, as this would both raise money for the fiscus and remove the liability from the state’s balance sheet.
Despite his gloomy outlook on SOE’s, Brooke foresees investment opportunities improving in SA next year.
He said the group’s investment strategy was forecasting a US economic downturn and a recovery in the SA economy, in what can be seen as almost a reversal of fortunes of the two countries.
"This is a dramatic change in momentum, where previously we’ve seen the US as the global winner, with a strong dollar, a bull market, record profits and superb growth, while the SA economy languished in recession, with a weak rand and an equity market that has gone nowhere," Brooke said.
Brooke said Old Mutual had increased its portfolio’s exposure to SA in the form of bonds and now is the wrong time for investors to go offshore in search of higher yields.
"Our offshore allocation is under the 30% regulatory threshold," he commented.
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