Where is the lo­cal cur­rency headed?

The rand has clocked up gains of more than 30% against the dol­lar since the end of 2015, and hit a 20-month peak of R12.43 on 24 March this year. It has re­mained re­silient since then de­spite a shock Cab­i­net reshuf­fle, credit rat­ing down­grades, news that t

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Strong

The gen­eral con­sen­sus is yes, with most an­a­lysts pre­dict­ing the rand will end the year at cur­rent lev­els close to R13 to the dol­lar even if the Re­serve Bank cuts in­ter­est rates again, as ex­pected. For many South Africans, the trend is puz­zling.

How­ever, the cur­rency has been sup­ported by two im­por­tant trends that show no signs of shift­ing soon. One is the global “risk on” en­vi­ron­ment, which means that in­vestors are con­fi­dent enough to pump money into emerg­ing-mar­ket as­sets for the bet­ter yields which they of­fer. The other is South Africa’s widen­ing trade sur­plus, which has nar­rowed the deficit on its cur­rent ac­count – the broad­est mea­sure of trade in goods and ser­vices. This is key as the short­fall must be cov­ered by in­flows of for­eign cap­i­tal into do­mes­tic bonds and eq­ui­ties – also known as “hot money” – which could sud­denly re­verse in re­sponse to a shift in sen­ti­ment to­wards the coun­try, or emerg­ing mar­kets gen­er­ally.

In June SA recorded its fifth con­sec­u­tive trade sur­plus, which was also the eighth over the pre­vi­ous 12 months. This brought the cumulative sur­plus for the first six months of this year to R27.68bn com­pared with a deficit of R5.04bn over the same pe­riod last year, ac­cord­ing to the lat­est data from the South African Rev­enue Ser­vice. Iron­i­cally, the re­ces­sion and weak house­hold con­sump­tion is mainly re­spon­si­ble for the im­prove­ment.

A third rea­son for the rand’s re­silience is that “real” in­ter­est rates – which take ac­count of in­fla­tion – are still pos­i­tive. Ac­cord­ing to Stan­dard Bank, even af­ter last month’s 25 ba­sis-point in­ter­est rate cut tak­ing the nom­i­nal repo rate to 6.75%, the Re­serve Bank will still run an av­er­age real repo rate of 1.85% next year if its in­fla­tion fore­cast proves to be cor­rect. The good news is that in the­ory this leaves room for an­other 50 ba­sis points worth of in­ter­est rate cuts with­out un­der­min­ing the rand.

George Gly­nos, man­ag­ing di­rec­tor of Econometrix Trea­sury Man­age­ment, be­lieves that the rand’s bull run has an­other six to nine months to go, and says the cur­rency could ap­pre­ci­ate by an­other 10% over that pe­riod – or at least hover around cur­rent lev­els. ■

Weak

At the other end of the spec­trum stands No­mura emerg­ing-mar­ket econ­o­mist Peter At­tard Mon­talto, who pre­dicts the rand will end this year at around R14 to the dol­lar, de­clin­ing to R15 at the end of next year. Mon­talto, a con­sis­tent pes­simist on the cur­rency, be­lieves that fi­nan­cial mar­kets are ig­nor­ing wor­ry­ing de­vel­op­ments and as­sum­ing that ev­ery nega­tive event is in fact “a path to a bet­ter out­come” for South Africa.

The big­gest red flag for in­vestors would be any un­der­min­ing of the in­de­pen­dence of the Re­serve Bank, which is seen by in­vestors as the last bul­wark of in­sti­tu­tional in­tegrity in the face of cor­rup­tion and “state cap­ture”. The rand wob­bled last month af­ter Public Pro­tec­tor Bu­sisiwe Mkhwe­bane called for a con­sti­tu­tional change in the bank’s man­date to fo­cus on growth rather than in­fla­tion, with the aim of pro­mot­ing so­cial well-be­ing. She has since backed down, but the ANC in­di­cated at its pol­icy con­fer­ence in June that it wanted to na­tion­alise the bank, with a fi­nal de­ci­sion to be taken in De­cem­ber. The big­gest threat to rand sta­bil­ity in the months ahead would be down­grades of SA’s lo­cal cur­rency rat­ings by Moody’s and Stan­dard & Poor’s, which have both kept them on the low­est rung of the in­vest­ment grade lad­der. This would be likely to trig­ger for­eign sell­ing of do­mes­tic bonds to the tune of $8bn to $9bn, which would hit the rand hard and likely force it to de­pre­ci­ate to around R15 to the dol­lar.

Bar­ring ma­jor po­lit­i­cal shocks, most an­a­lysts be­lieve this is un­likely to take place un­til af­ter rat­ing agen­cies have di­gested the out­come of the De­cem­ber ANC lead­er­ship con­fer­ence and the Na­tional Bud­get in Fe­bru­ary, which will be the first one for newly ap­pointed fi­nance min­is­ter Malusi Gi­gaba. None­the­less, the lead­er­ship con­test be­tween ANC fac­tions sup­port­ing Pres­i­dent Ja­cob Zuma and those op­posed to him has the po­ten­tial to cause a ma­jor up­set, and any in­di­ca­tions of a clear vic­tory for the Zuma camp ahead of time will take its toll on the cur­rency. Signs of flag­ging ap­petite for emerg­ing-mar­ket as­sets would also be nega­tive for the rand. ■

The head­quar­ters of the South African Re­serve Bank in Pre­to­ria.

George Gly­nos Man­ag­ing di­rec­tor of Econometrix Trea­sury Man­age­ment

Peter At­tard Mon­talto Econ­o­mist at No­mura

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