Could this be rand’s year?
DOWNSLIDE: IT LOST 9% TO US DOLLAR IN 2023, AND 17% OVER THE PAST TWO YEARS
Much of local currency’s woes are due to load shedding, which should ease as elections near.
History has shown that it is never a good idea to be bullish on the rand, but could 2024 prove to be one of the rare occasions when the local currency smokes the US dollar? The rand weakened against the US dollar in seven of the last 10 years. The last three years were a rout, with the rand losing nearly 30% against the US dollar as Covid, load shedding, grey-listing by the Financial Action Task Force and issues at Transnet brutalised the local currency. Why should 2024 be any different? Theoretically, it shouldn’t. A Reuters poll in December suggests more than half emerging market currencies are likely to gain against the dollar in 2024, though the Turkish lira and South African rand are not expected to recover their losses any time soon.
There are plenty of reasons to bet against the rand – among them, continuing load shedding, bottlenecks at Transnet, and what is likely to be the most tightly contested election – but expectations of a weaker US dollar point towards a better outlook for emerging market currencies.
With interest rates in the US likely to trend lower, emerging market currencies will benefit from the carry trade – where investors borrow in low interest rate countries to invest in high interest rate countries (like SA).
The MSCI International Emerging Market Currency index is up 4% since October in anticipation of this turn in the interest rate cycle.
A chart from Bloomberg shows the rand against other emerging market currencies in 2023, and it is not a happy picture.
Of 22 emerging market currencies, the rand came fourth last.
“Load shedding remains a bind on growth and investor sentiment, as does Transnet’s enormous, and worsening logistical problems over 2023, which has also negatively affected state revenues and so foreign investor sentiment into markets,” said Investec chief economist Annabel Bishop to clients.
There are signs that the problems at Eskom and Transnet are somewhat improved. President Cyril Ramaphosa last year told Transnet that he expected improvements at Transnet by early 2024, and last week we learned that backlogs at the Durban container port had reduced from around 20 ships at anchor in December to just five in early this month. So there’s that.
The end of load shedding is still five years away, according to Eskom, and the ruling party knows it is going to be judged harshly by voters in the upcoming national elections, now a few months away.
Much of the bad news is priced into the rand. The chokehold that Eskom and Transnet exert over the economy will take years, perhaps decades to fix. And that means the economy can expect dismal growth of perhaps 0.7% to 1.5% a year for the next two years, according to Stanlib.
Predictions
So where does this leave the rand in 2024? At R18.21 to the US dollar according to Nedbank, slightly better than its current rate. Investec sees it at R17.60 in the final quarter of 2024, after averaging R18.80 for much of last year.
Last year Goldman Sachs predicted the rand would strengthen to R14 to the dollar by 2026, and reach R17.50/USD by the middle of 2024. Chief economist at The Efficient Group, Dawie Roodt, has consistently argued the rand should be valued closer to R15-R16 to the US dollar based on its purchasing power parity value.