The Star Early Edition

Capital outflows could sink rand

- Justin Brown

THE RAND could weaken to as much as R19 to the dollar this year due to capital outflows and a widening current account deficit but interest rate hikes could provide some support, Nomura economist Peter Montalto said last week.

Montalto identified four key drivers for the rand this year.

These included capital outflows as local retail and institutio­nal investors put their money offshore.

“No recession and higher rates mean the process has been orderly rather than panicked,” Montalto said.

Foreign investors were also likely to pull their money out of the country due to the forecast US interest rate hikes and given the weak dynamics of emerging market fund flows, he added. “We expect to see slow, orderly grinding outflows from foreigners as the US hikes and the domestic junk downgrade story progresses.”

The current account deficit is expected to widen this year from a deficit of 4.1 percent of gross domestic product (GDP) in the third quarter to 5 percent of GDP at the end of this year.

“Foreign direct investor net outflows as domestic private sector investment is directed offshore especially to the rest of Africa. All of this suggests to us a steady but orderly weakening. We think R18.37 to R19 as a target rand for year-end makes sense, and pin out point forecasts at R19.

“This seems big, but the rand exchange rate to the US dollar was 35 percent up last year. We are pencilling in a 22.1 percent increase from endDecembe­r or 18.8 percent from current levels..”

Non-farm payrolls

Montalto added: “This seems achieving in a country facing a downgrade and widening current account deficit and capital flight, and with China and US Federal Reserve hikes looming. We are in uncharted territory here. “We pencil in R20 for end2017 on the assumption that most of the domestic story will be out of the way by then.”

Michael Galatis, a currency trader at Rand Merchant Bank, said the rand faced another tough year. “All eyes are going to be on the Budget speech in February. We are going to be watching to see whether there are going to be tax hikes and whether the government will cut back on spending,” he said.

“We are looking for stronger leadership and good decision from government. This year we will also be keeping a close eye on credit rating agencies and any moves that they make.”

On Friday at 7.15pm, the rand was quoted at R16.1855 to the dollar after earlier falling to an all-time low of R16.2692.

Galatis said the drivers of the rand exchange rate on Friday had been US non-farm payrolls, which had come out better than expected and the Chinese stock market had recovered earlier in the day, which had been positive for the rand. US payroll growth surged last month providing further evidence of a resilient job market that prompted the Federal Reserve to raise interest rates.

The 292 000 gain exceeded the highest forecast in a Bloomberg survey and followed a 252 000 increase in November that was stronger than previously estimated.

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