What’s it all a-baht?

Not ev­ery­one thinks the rand will tum­ble fur­ther this year

Finweek English Edition - - Economic trends & analysis - GARTH THE­UNIS­SEN

THE MIS­FOR­TUNES suf­fered by the rand last year are in­ex­tri­ca­bly linked to South Africa’s over­sized cur­rent ac­count deficit, which at 6% of GDP in the first quar­ter of the year is the third largest deficit of 20 emerg­ing economies mon­i­tored by Morgan Stan­ley Re­search.

In fact, only Hun­gary (6,7%) and Turkey (7,4%) run larger deficits on their cur­rent ac­counts. That’s largely what sent the rand tum­bling from a high of R5,93 against the US dol­lar in Jan­uary to a low of al­most US$1/R8 by Oc­to­ber last year.

It’s also why T-Sec econ­o­mist Mike Schüssler says the rand could fall as low as US$1/ R8 and R10 to the euro over the next eight months. That would fol­low the roughly 20% de­pre­ci­a­tion suf­fered by the rand last year on a trade-weighted ba­sis.

Nev­er­the­less, there are plenty of dis­senters who still ar­gue that the rand is un­der­val- ued – even with a cur­rent ac­count deficit of 6% of GDP. In the third quar­ter of the year it was down to 5,2%.

The latest to join the throng is re­search house Morgan Stan­ley, which ranks the rand as 12th most likely (of a bas­ket of 20 emerg­ing mar­ket units) to ap­pre­ci­ate against the US dol­lar in the year ahead.

In­ter­est­ingly, SA is the only coun­try with a size­able cur­rent ac­count deficit that isn’t ranked near the bot­tom of the lad­der. Turkey is ranked 17th, while Hun­gary ranks sec­ond last in 19th place.

Though a rank­ing of 12 doesn’t im­ply out­right ap­pre­ci­a­tion, what it does in­di­cate Bal­lim has sim­i­lar views. He sees the rand av­er­ag­ing around US$1/R7,34 this year, with weaker com­mod­ity prices the big­gest down­side risk to the lo­cal unit.

Given that com­modi­ties still make up just more than 40% of SA’s ex­ports you can eas­ily see why Bal­lim is less wor­ried about the cur­rent ac­count deficit than the pop­u­lar press – par­tic­u­larly if you re­mem­ber that the deficit on the cur­rent ac­count is still be­ing ad­e­quately fi­nanced by for­eign cap­i­tal in­flows.

FNB chief econ­o­mist Cees Brugge­mans also sees the rand av­er­ag­ing is that Morgan Stan­ley doesn’t an­tic­i­pate any dra­matic fur­ther weak­en­ing in the rand from cur­rent lev­els.

Stan­dard Bank chief econ­o­mist Goolam

Morgan Stan­ley doesn’t an­tic­i­pate any dra­matic fur­ther weak­en­ing in the rand.

at around US$1/R7,30 to the green­back, largely on dol­lar strength as op­posed to rand soft­ness.

The other po­ten­tial down­side risk to the rand is po­lit­i­cal tur­bu­lence, which could af­fect in­vestor sen­ti­ment. In­ter­est­ingly, that doesn’t seem to have hurt the Thai baht. Last year the baht was the best per­form­ing cur­rency in Asia de­spite the fact that that coun­try’s gov­ern­ment was top­pled in a mil­i­tary coup – the 18th since the Sec­ond World War. In fact, the baht surged 15% to a nine-year high in the wake of the coup, thanks to huge in­flows into the stock and bond mar­kets as well as for­eign di­rect in­vest­ment.

The cur­rency also sur­vived in­ter­ven­tion by Thai­land’s cen­tral bank, three dif­fer­ent ex­change rate regimes and a ter­ror­ist at­tack in Bangkok on New Year’s Eve. That’s prob­a­bly why Morgan Stan­ley has ranked the baht as the emerg­ing mar­ket cur­rency fourth-most likely to ap­pre­ci­ate against the US dol­lar this year.

That brings to mind an ut­ter­ance by for­mer US Fed­eral Re­serve chair­man Alan Greenspan, who once pointed out that the Fed had spent more money try­ing to fore­cast cur­ren­cies than any other vari­able – but with the least amount of suc­cess.

COUN­TRIES WITH CUR­REN­CIES THAT SHOW MOST AP­PRE­CI­A­TION PO­TEN­TIAL

Source: Morgan Stan­ley

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