Article by Business Tech
The rand is likely to weaken back up to R15.16 against the dollar by the end of the first quarter, and reach R16.13 by year-end, according to data published by financial services group, Absa.
The group said in a research note that volatility will persist into 2020, taking the lead from 2019, as both local and international factors will continue to come into play.
Absa said that, currently, data shows that the rand is slightly overvalued, and should be trading towards R14.80, as opposed to its current level of R14.58. It noted that the local unit strengthened towards the end of last year.
Dollar/Rand: R14.58 (0.50%)
Pound/Rand: R18.97 (0.41%)
Euro/Rand: R16.18 (0.52%)
“Both our structural ZAR model, which estimates the fair value of the exchange rates based on SA’s current account balance and the country’s interest rate differentials, and our Peer model, which compares the ZAR to other high-yielding and commodity-based currencies, imply the ZAR is currently overvalued,” Absa said.
Absa said that it expects the rand to be particularly vulnerable to capital outflows during the first half the year because it believes Moody’s is likely to downgrade South Africa’s local currency credit rating in March, which in turn will eject South African Government Bonds (SAGBs) from the World Government Bond Index.
An additional event, which hasn’t generated much attention, it said, is that JP Morgan is scheduled to further reduce South Africa’s bond weighting within its emerging market bond index during the first half of 2020.
“The rand could actually weaken by more than we expect if the SARB cuts policy rates by more than the market currently expects and/or the economy falls back into recession,” Absa said.
The International Monetary Fund (IMF) on Monday (20 January), cut South Africa’s growth forecast to 0.8% for 2020, citing structural challenges as well as fiscal strain as the leading causes.
Conversely, the ZAR might prove to be more resilient than we believe if global volatility levels continue to subside on the back of reduced global trade tensions, which in turn could rekindle the ZAR’s carry trade appeal. Any further improvement in South Africa’s terms of trade might also support the ZAR.
Absa said that favourable trade deals could boost the rand, and strengthen local markets. Conversley, deterioration in the growth prospects, could see the rand weaken further than its forecast.
Absa, said it has also cut its GDP forecasts sharply. “Persistently weak business sentiment and ongoing bouts of load shedding are constraining South Africa’s growth prospects, while the drought seems likely to have a significant negative effect this year as well.
“We now forecast real GDP growth of just 0.3% for 2019, 0.9% this year and 1.2% in 2021,” it said.
Additional concerns include Eskom, and the return of load shedding at the beginning of December, and again in early January.
It is, Absa said, “an unwelcome reminder that Eskom’s ongoing operational challenges, especially in generation, remain a severe downside risk to Eskom’s finances, the fiscus, and South Africa’s growth prospects.”
Mike Keenan – principal and head of South Africa strategy at Absa – said that volatility will persist, with the rand likely to continue to be affected by headlines. “The idea is to try to look through the noise,” he said, with the GDP number the leading metric.
“I don’t think the currency is going to experience a blowout,” said Keenan. He said that shock absorbers are in place to prevent that including a limit on offshore investment.
Eskom continues to be a major source of fiscal and general macroeconomic risk, Absa said.
“The unbundling programme laid out in the discussion paper last year on its own cannot fix the electricity sector’s challenges and the pushback against reforms at Eskom is intense.
“Load shedding is likely to continue and Eskom may need even more bailout money than that already allocated by the government.”
Source: This article was published by BusinessTech in collaboration with Absa.