Rand’s early gains this year risk being wiped out, survey shows

DIFFICULTY in holding down public spending in South Africa and the possibility that interest rates will rise rapidly in the US are likely to wipe out the rand’s early gains this year and lead to its weakening further in 12 months, a Reuters poll showed yesterday.

The South African currency is expected to weaken almost 8 percent to 14.43 per dollar in a year, according to a median of up to 39 strategists in a poll taken on February 2-6. It is currently trading at around 13.40.

Sluggish growth “We are still concerned about some of the domestic fundamentals, sluggish growth, (and) whether we can achieve fiscal consolidation,” said Absa currency strategist Mike Keenan.

That means ratings downgrades are still a possibility this year, possibly in the first half of the year, Keenan said.

South Africa got a reprieve in December when all three major credit ratings agencies kept their ratings stable. Standard and Poor’s and Fitch’s ratings are both one level above junk status, Moody’s two notches above.

Moody’s, which put South Africa on negative watch, is due to revisit that on April 7, followed by S&P at the beginning of June. We are concerned about domestic fundamentals, sluggish growth, (and) fiscal consolidation

The Treasury will have a chance to reassure credit agencies it is keeping to its commitment to reduce public debt when it holds its budget review in just over two weeks.

Political tensions and weak economic growth are the biggest challenge to South Africa’s sovereign credit rating. S&P noted that infighting in the ruling ANC may derail efforts to improve policy implementation.

The rand has gained over 3 percent since the beginning of the year, along with other emerging market currencies. US President Donald Trump’s harsh protectionist rhetoric has increased demand for riskier currencies.

“The currency has strengthened quite a lot, so we do not see the rand as grossly undervalued as it was this time last year. We now think it is close to fair value. So for us the currency has already recovered substantially,” Keenan said.

Trump policies However, a lot of Trump’s proposed policies – including increased spending on infrastructure – promise to push up inflation in the US, changing the outlook for rates.

“The chances of more rate hikes have declined in South Africa, while in the US the risk is that they hike rates more aggressively than what is currently priced into the market,” Keenan said.

South Africa’s repo rate, now 7 percent, is not expected to change this year. Inflation is expected to average 5.5 percent.

The US Federal Reserve, which raised rates in December, has forecast three rate increases this year. Wall Street dealers expect only two rate increases. – Reuters