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Cape Town – SA Reserve Bank (Sarb) governor Lesetja Kganyago said he believes the rand may end 2016 stronger than it started for the first time since 2010.
Speaking at the South African Summer Macro Conference on Friday, Kganyago said the exchange rate has recovered some ground. “Although its volatility reminds us how rapidly these gains could unwind, the rand has appreciated roughly 15% against the US dollar from January’s lows,” he said. “Accordingly, our forecasts show inflation reaching 5.5% by the end of 2018.”
The rand teased the R14/$ ceiling on Friday, touching R14.04/$ before heading back to R14.18/$ by 13:00.
Kganyago's speech comes a day after he announced that the repo rate would remain unchanged at 7% (prime lending rate at 10.5%).
READ: Sarb holds interest rate steady
It also comes on the day that Moody's will announce its ratings review of South Africa (currently two notches above sub-investment grade) and a week before S&P announces its review (one level above junk status with a negative outlook). Any downgrade could cause shocks to the rand and markets.
Kganyago said one of the “puzzles of the post-crisis period” was that “rand depreciation has not brought about all the trade benefits we would normally expect”.
“In 2010, with the rand close to seven to the dollar, we were repeatedly urged to intervene with the message that a rand closer to R9/$ or R10/$ would do wonderful things for exports.
“Yet as the rand passed R10/$, then R12/$, then R14/$, then R16/$, net exports stayed weak,” he said. “In part, this reflects global factors; for instance, falling commodity prices lower export values.
“With the spread of global value chains, moreover, national exchange rate movements have smaller effects on trade: higher import prices offset lower selling prices,” he said.
He also pointed to domestic factors. “New research demonstrates convincingly that constraints such as electricity shortages, as well as product and labour market rigidities, have reduced the stimulatory effect of a cheap exchange rate.
“There is also compelling evidence that policy uncertainty has further weakened net exports,” he said.
Kganyago said the lack of a trade response to rand depreciation is one of the biggest missing parts of the recovery.
“It would have made two vital contributions, supporting growth and moderating the current account deficit,” he said. “As it is, we can feel confident that rand depreciation has at least supported existing exporters, such as our miners.
“We should also anticipate a stronger net export response if some of the constraints on the economy loosen, as we expect them to do over the next few years. As such, it is important for growth and rebalancing that inflation moderates and we maintain the beneficial effects of a depreciated rand.”
