Lagarde’s out­look bodes ill for the rand’s re­cov­ery

CityPress - - Business - XOLANI MBAN­JWA xolani.mban­jwa@city­press.co.za

Se­nior econ­o­mist at Old Mu­tual Jo­hann Els said In­ter­na­tional Mon­e­tary Fund head Christine Lagarde’s warn­ing that emerg­ing mar­kets would re­main “dis­ap­point­ing and patchy” in 2016 was not good for the rand.

Most in­vestors would have to wait un­til the mid­dle of this month to see whether the pan­icked sell-off of African cur­ren­cies in the past month would con­tinue, he added.

Els said Old Mu­tual, an in­ter­na­tional in­vest­ment, sav­ings, in­sur­ance and bank­ing group, an­tic­i­pated that there would be some scope for the rand to sta­bilise this year. He ex­pected the cur­rency to level out at R14.50 to the dol­lar, de­spite open­ing at R15.53 on Thurs­day morn­ing.

“We do think there’s some scope for the rand to sta­bilise dur­ing the next year. Any forecast will prob­a­bly be wrong be­cause pol­i­tics and the econ­omy are not cer­tain, but we do think there will be some sta­bil­i­sa­tion.

“At the mo­ment, we think the rand can only end 2016 at around R14.50 to the dol­lar. That’s not really strong, but it’s an in­di­ca­tion of some sta­bil­i­sa­tion. We don’t think it will go up to R16 or R17 in the short term,” he said.

Els also ex­pected the crude oil price, which hit record lows of $36.70 on Thurs­day, to rally back up to $55 by the end of 2016 be­cause the US in­ter­est rate hike had not se­verely dented the global econ­omy, while Chi­nese mar­kets were also sta­bil­is­ing.

Over­sup­ply of oil from big pro­duc­ers such as Libya, Iraq and Rus­sia, cou­pled with ex­tra sup­ply from Iran, which re­cently came back on stream, meant the price was set to re­main lower in the first half of the year.

“The oil price is good news for the lo­cal petrol price and it’s saving us a lot be­cause, had it been higher, with the weak rand, we would have seen sig­nif­i­cant petrol price in­creases. For now, it’s good, but we do see a peak to $55 per bar­rel by the end of 2016. That is es­pe­cially dif­fi­cult to forecast be­cause the global econ­omy is do­ing a lit­tle bit bet­ter – but it seems that there’s so much ex­tra sup­ply.

“We do see some re­cov­ery in the oil price, but noth­ing dra­matic, cer­tainly noth­ing close to the lev­els of $110 per bar­rel soon be­cause of that over­pro­duc­tion, and the Iran sup­ply com­ing back on­line,” he said.

Lagarde’s warn­ing that emerg­ing mar­kets were un­likely to look good in 2016 meant the rand was likely to also re­main weak.

“If emerg­ing mar­kets as a whole re­main weak, that means the rand will also re­main weak, but the rea­son we think there will be some sta­bil­i­sa­tion in the rand is that the rand has weak­ened so much more than all the other emerg­ing mar­ket cur­ren­cies.

“The rand is al­ready a whole lot weaker, but pres­sure will re­main on com­mod­ity- and ex­port-de­pen­dent cur­ren­cies,” said Els.

South Africa would be “lucky” to at­tain 1.5% eco­nomic growth in 2016 be­cause com­mod­ity prices were not ex­pected to change.

“At best, the prices of com­modi­ties will sta­bilise. A range of other fac­tors, in­clud­ing the rea­sons given by rat­ings agen­cies to down­grade South Africa – par­tic­u­larly the lack of eco­nomic growth – will have an ef­fect on the cur­rency and our econ­omy as a whole.

“We would be lucky to get 1.5% in 2016, but the lack of eco­nomic growth is bad for us, and the fact that for­eign trade and cur­rent ac­count deficits re­main large means we’re de­pen­dent on for­eign in­vestors to make up that short­fall,” added Els.

The fact that South Africans did not save enough money meant the coun­try’s econ­omy would de­pend on for­eign in­vestors for South Africa to close the short­fall caused by the deficit.

But with in­vestor con­fi­dence low, grow­ing un­cer­tainty in the mar­kets about South Africa’s eco­nomic pol­icy and the re­cent reshuf­fling in Trea­sury, in­vestors were likely to look else­where to spend their money.

“When in­vestors see a lack of eco­nomic growth and in­co­her­ent im­ple­men­ta­tion of eco­nomic poli­cies, they are not keen to in­vest in South Africa, and may look for other op­por­tu­ni­ties.

“If we can’t fi­nance the deficit be­cause in­vestors are not com­ing here to fi­nance that deficit, then that will have an im­pact on the rand,” said Els.

South Africa’s low po­si­tion on the global com­pet­i­tive­ness in­dex meant that in­vestors, lo­cal and for­eign, were likely to con­sider “ex­pen­sive, un­skilled and un­e­d­u­cated labour, and mil­i­tant unions be­fore ex­pand­ing their oper­a­tions in South Africa”.

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