South Africa rand expected to weaken as fiscal worries return

by | January 5, 2018 11:47 am

The rand is likely to weaken over 12 percent this year, hit by doubts about how much the new leader of the ruling African National Congress, Cyril Ramaphosa, a promised reformer, can do for South Africa’s ailing economy.


The rand is expected to weaken to 13.85 against the dollar by the end of the year, according to a Reuters poll of strategists published on Friday. That is a smaller decline than the 14.30 predicted during 2018 in the previous poll.


“I am not sure how the budget is going to work, how free education is going to play out. I am not sure what downgrades are going to happen based on that information,” said Frank Blackmore, an economist at EFConsult.


S&P Global Ratings downgraded South Africa’s local currency debt to sub-investment grade in November and pushed its foreign currency debt deeper into “junk” territory. Moody’s put the country on review for a downgrade.


“Therefore I don’t think there will probably be a miracle, although I hope so,” Blackmore said.


The rand has been buoyant, at 12.29 against the dollar, a level strategists say is just about fair value for the currency, after Ramaphosa was elected leader of the ANC, succeeding President Jacob Zuma.


However, technical indicators suggest the rand is overbought. A week ago, the currency touched its strongest level in more than two years, after Ramaphosa was elected.


“It is still going to be a challenging year. There is some scope for the rand to appreciate, but investors will be looking closely at how quickly Ramaphosa will be able to make progress on structural reforms,” said Piotr Matys, a strategist at Rabobank.


Ramaphosa won the race to be leader of the ANC but failed to decisively wrest control of South Africa’s ruling party from Zuma.


“I have belief in Cyril, but in the split of the top six ANC officials, I don’t know how much he can get done,” Blackmore said.


His incomplete victory could stymie his chances of implementing reforms to stimulate economic growth, which he placed at the centre of his campaign for the ANC’s top job.


A separate Reuters poll last month suggested the economy needs political support to maintain upward momentum into this year, just days before the ANC conference.


That poll put growth for this year at 1.2 percent from a 0.9 percent estimate for last year. It also showed rates are expected to remain on hold at 6.75 percent through to mid-2019 at least.


Matys added that he does not expect the Federal Reserve to speed up its tightening of U.S. rates. At the same time, the South African Reserve Bank is in no hurry to lower rates, so that differential ought to offer support to the rand.