Old Mutual expects rand to shoot out the lights

Old Mutual says the rand could rally “significantly” in the short term and is likely to settle at about R15.20/$ by the end of 2023, thanks to the reduction in SA’s sovereign debt risk and the likelihood of global interest rate hikes nearing an end.

“There’s more to come on the rand, perhaps significantly more in the short term — R15.20 is my end-2023 forecast [but] in the interim it is possible that the rand can get even stronger than that,” said Old Mutual’s chief economist, Johann Els.

While the group’s economic growth forecast for SA is a fairly moderate 2.1% for 2022 and 2% for 2023, it says the radically improved debt projections outlined in the medium-term budget policy statement will bolster investor sentiment towards the local currency.

An end-2023 forecast of R15.20/$ would be more than R2 stronger than the rand’s current level of R17.32/$.

Old Mutual also argues that the US Federal Reserve is nearing the end of its aggressive rate

hiking cycle, which means the dollar is likely at or near a peak level that will see it lose some ground in 2023 to end the year at about 1.10/€.

Old Mutual is also forecasting that the Reserve Bank will hike rates once more by 50 basis points (bps) in November, with an outside chance of a further 25 bps in January before ending its tightening cycle. That will grant weary SA consumers a timely reprieve from the rising cost of living.

“The rand can still strengthen quite significantly,” said Els.

“I think the rand can come back quite a bit in the next several months.”

While SA’s economy still faces a plethora of challenges, the improvement in the budget deficit, which is now expected to ease to 4.9% of GDP for the fiscal year to end-March 2023 compared with a 6% forecast in February’s budget, is a major positive catalyst for the rand.

At the same time, the Treasury’s forecast that the fiscal debt load will stabilise at about 71.4% of GDP in the 2022/2023 fiscal year before declining further — far lower than the previous expectation of 75% of GDP in 2024/2025 — is likely to further bolster investor sentiment towards SA.

“There’s been a significant reduction in fiscal risk,” said Els.

While inflation reached an annual 7.5% in September, Els expects price growth to moderate significantly in the year ahead before settling at about the midpoint of the Bank’s 3%-6% target range at end-2023.

The Fed pivot on interest rates is likely to benefit emerging-market currencies such as the rand, which typically weaken when US rates rise as investors flee to the greenback to benefit from the rising dollardenominated returns.

“It’s becoming clearer to markets that we’re getting to the end of the rate-hiking cycle because inflation is easing,” said Els. “The interest rate hiking cycle globally and in SA is coming to an end. We’re very close to the end.”