BNP predicts rand will improve in the long term

The rand has been particularly battered of late and has been among the worst-performing emerging-market currencies in 2020. But BNP Paribas economist Jeff Schultz expects the currency to improve in the long term.

The rand has been rocked by a number of factors in the past few months, which has seen it hit its lowest levels in years. These include the US-China trade war, the threat the coronavirus outbreak poses to the global economy and, more recently, tumbling oil prices.

This week, oil prices had their biggest collapse in nearly 30 years after Saudi Arabia started a price war with Russia, resulting in a global markets crash, the likes of which has not been seen since the 2008 financial crisis.

Emerging-market currencies, including the rand, and stocks have been particularly hard hit. The rand has been the second-most volatile emergingmarket currency in the past three months, with levels reaching 18.45%, second only to the Mexican peso, at 18.5%.

Schultz believes the SA economy will “reflect a likely sharp deterioration in activity” in the first half of the year. However, the “SA Reserve Bank is now likely to feel growing pressure to cut interest rates amid co-ordinated global policy support”.

BNP expects cuts of a further 75 basis points (bps) in 2020, with the next 25bps drop to come on March 19, “rather than our previously expected [final] 25bps cut in May”, Schultz said.

“We believe the expected rate cuts will help the SA [bond] curve to shift down. The country already has one of the steepest curves in the entire emergingmarket complex, and the recent move in global rates along with the Fed rate cut is very supportive for local rates in emerging markets, including SA,” he said.

“In this context, we continue to see value in the long end of the SA government bond curve. We also favour a tactical long rand position to benefit from the recent emerging-market currency weakness and rand underperformance.”

In an attempt to minimise the effect of the virus, global central banks are poised to implement further stimulus measures.

With weak growth, very low inflation and currency volatility, Old Mutual Investment Group economist Johann Els believes it is better to wait for calm to return to the markets before making forecast adjustments.

“The situation remains very fluid and we need to see where oil and currencies settle before I firm up on forecasts. But growth will likely be weaker than feared and inflation will ease even further. I expect the Reserve Bank to cut rates next week in reaction to the weak growth picture, global risks and policy easing. More rate cuts will likely follow later this year,” said Els.