Experience has taught us that the direction of the rand, how far, or when it will fall or rise against hard currencies such as the USD is notoriously difficult to predict. The last time the rand’s tumble was this dramatic was in 2001 when it collapsed from R7.60 to the USD to R13.84. Recently the rand’s fall has been more dramatic. There are differing views as to where the rand will go to from here. One is that we are in a period of sustained weakness for a while. Reasoning for this view is as follows:
The forces at play against the Rand at the moment are not insignificant. Taking a foreign view of Emerging Markets (EM) as a whole, EM are experiencing:
- Low growth
- Weak commodity prices
- Rising US interest rates
Within this universe, alongside Russia, Brazil, Argentina and Turkey for example, SA has the following:
- Low and slowing growth
- A large current account deficit (every month R10bn is leaving SA, we need R10bn into SA to keep the currency the same)
- Possibility of a credit downgrade in June
- Poor politics and policies
What is going to change?
- EM suddenly get better?
- Are commodity prices about to surge?
- Is the US going to stop raising interest rates?
- Is SA suddenly going to become an attractive investment destination?
- Is SA suddenly going to become an export success story?
Logically this shows pressure against the Rand. With Fair value around R11/$, where and when does the depreciation stop? There is no way of knowing. What do we need to see to show that it will stop?
- Imports slowing dramatically
- Local business using domestic suppliers rather than imports
- SA exports surging in rand terms and exporters becoming aggressive in terms of pricing to global markets
- Tourism returning significantly
If data releases surrounding these factors improve, the Rand will stabilize and come back a bit. These tangible differences include manufacturing increasing and export volumes rising. At some level of the Rand, this does happen (i.e. imports become too expensive and customers cannot afford goods; local suppliers are sourced if there is enough that haven’t closed down due to imports and assuming they can cope with the orders).
The forces at play against the Rand are not insignificant and the correcting mechanisms are sticky. This is a recipe for sustained weakness.
Source: Kevin Lings, Chief Economist, STANLIB; Alison Barker , FOREX PEOPLE (PTY) LTD