What’s it all a-baht?
Not everyone thinks the rand will tumble further this year
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.