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Why the rand is likely to show a steady decline in the long term

Sep 11 2018 17:33
Carin Smith

Stellenbosch – It is virtually impossible to predict what the rand will do, but in the long-term it is likely to show a steady decline, according to Andrew Rissik, managing director of forex and international projects at Sable International.

“As long as the rand is not attractive to long-term capital investment, we will see it devalue compared to more efficient economies,” he said at the Rode Reim Real Estate Conference on Tuesday.

“It amazes me that politicians can accuse the private sector of an ‘investment strike’ when listening to the talk about expropriation without compensation [which ] will certainly not encourage such investment.”

Rissik said currently there are massive offshore investments being made by SA investors, thus pointing out that the SA government will not really manage to encourage international investors to invest in the country if local investors are increasingly looking offshore.

Furthermore, what he calls “short-term noise” leading up to the national elections next year will not help the rand.

At the same time, Rissik pointed out that SA’s situation could have been a lot worse if Cyril Ramaphosa did not win the ANC leadership race in December.

Real estate

According to Rissik, rand weakness creates negative sentiment, which in turn impacts the real estate market.

One of the consequences of the inflationary drivers because of the weak rand is that people hesitate to buy houses.

“The Cape Town property market has slowed due to many people in Johannesburg wanting to sell their homes and move to the Cape, but not being able to get their properties sold,” said Rissik.

“At the same time, property investors from overseas seem to be scared off more of SA property. It is difficult to assure potential international investors that their property will not be expropriated.”

Rissik said many South Africans across all demographics are emigrating or looking for a Plan B. They are all selling their assets and investing offshore. All these factors are eroding the local property market.

If, on top of that, interest rates in SA start to go up, that will further dampen the property market.

Emerging market sentiment

Nicky Weimar, senior economist at Nedbank, agreed with Rissik that the rand is the “most unforecastable” currency. The rand also has a significant impact on what happens to inflation.

Weimar explained that the rand’s value is almost always determined by how international investors regard emerging markets (EMs). If they have a positive EM risk appetite, the rand usually strengthens and vice versa.

Currently, all EM currencies are under pressure and some more so than others, because of a decline in the EM risk appetite among investors. Weimar said that is why one has seen capital outflows from EMs.

“Ultimately, the only way to continue to attract capital inflows is to hike interest rates. The pressure is there on SARB to start raising interest rates. The other factor weighing on EM currencies is the global trade war,” explained Weimar.

She said the other reason the rand is taking more strain is because the government is contemplating expropriation without compensation.

“That is scaring the living daylights out of investors,” said Weimar.

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