Rand recovery won’t last, set for another battering

Government policies stifle economic growth

THE rand’s rebound this month will continue this year before reversing its gains next year, according to the most accurate forecaster of the rand’s strength against the dollar.

But the bad news is that Danske Bank A/S, the best at predicting the rand’s value against the dollar in the past four quarters, expects the rand to tumble next year.

Danske Bank predicts that the rand will rally about 3% to R9.67 to the dollar by the end of this year before weakening 6.2% in the next three quarters. The rand’s 15% slump this year is the worst of 16 major currencies.

This year’s recovery will prove short-lived because of the government’s failure to rein in unions, as well as its policies, which stifle economic growth, according to Lars Christensen, Danske’s chief emerging-markets analyst.

“I’m really worried about the direction South Africa is taking,” Christensen said.

“Some of the policy directions taken by the government are not consistent with market reforms and free markets.

“The cost of that is going to be fairly high.”

Citigroup forecasts that the rand will gain to R9.80 to the dollar by year-end before falling to R10.20 next year. XTrade Brokers Dom Maklerski SA, the third-most accurate, predicts the rand will drop to R10.12 by the end of the second quarter of next year.

The currency will probably appreciate about 2% to R9.80 by the end of next year, according to the median forecast of 30 analysts.

President Jacob Zuma is reviewing mining royalties as he comes under pressure to alleviate poverty and inequality in the world’s biggest producer of platinum and chrome.

With elections due to take place next year, the African National Congress is seeking to cut a 25% unemployment rate and reduce income disparities that are among the highest in the world.

Strikes in industries like mining and car making have undermined investor confidence. BMW, the world’s largest maker of luxury vehicles, said it would halt expansion plans after a threeweek strike that cost the

I’m really worried about the direction South Africa is taking

industry as much as R700million a day.

“South Africa is becoming less globally competitive in terms of wages, energy cost, water cost,” said BMW spokesman Guy Kilfoil.

“All of those things are making South Africa a less attractive destination for foreign investment.”

The country relies on foreign investment to plug the gap in the current account, funds which may dry up as the Federal Reserve starts tapering monthly bond purchases. That leaves the country vulnerable to external shocks, according to the International Monetary Fund, which said South Africa needed “structural reforms” to improve government services, ease infrastructure bottlenecks and increase labour market flexibility.

The current-account deficit rose to 6.5% of gross domestic product in the second quarter from 5.8% in the first. It will probably stay under pressure after rising to R19.1-billion in August, the biggest since January. The budget shortfall hit 5.1% of GDP in the year to March, according to Treasury estimates.

Moody’s Investors Service and Standard & Poor’s stuck to their negative outlook for the country’s debt after downgrades last year, citing concern that spending will rise before the elections.

Political “noise” was rising before the elections, labour issues remained complicated, and all of that added to the rand’s risk premium, said Citigroup’s Gina Schoeman.

“If we face another creditrating downgrade, as I believe we do, we will see that reflected in bond yields, and we will see that reflected in the currency.”

The rand’s decline in the past three years may have been enough to start boosting exports as the global economy recovers, according to analysts, including David Bloom, head of currency strategy at HSBC, Europe’s biggest bank.

HSBC forecasts that the rand will end the year at R9.80 and extend its recovery to R9.20 by the end of next year.

“It is true that the weak rand is making our exports more competitive, but we can’t get those exports out of the ground,” Schoeman said, referring to mine strikes that contributed to an 8.6% fall in production this year. “Even if the current account gets a bit better, it will disappoint expectations.”— Bloomberg Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.timeslive.co.za