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Key structural factors are working against the strength of the rand in the medium term, but economists disagree on the prospects of the central bank hiking the repo rate to stem the currency’s persistent weakness.
Major economists, however, agree that the currency will most likely remain weak for some time but at least one believes that it is much undervalued and will start clawing back value later in the year.
Bloomberg reported that the rand depreciated to the lowest intraday level against the dollar since March 2009. At 5pm it was bid at R10.644 to the dollar.
Peter Attard Montalto, an emerging market economist at Nomura International, stuck his neck out in his economic insights for 2014 published yesterday. He argued that a variety of factors – including the volatile political period ahead, with national elections expected in April or May – would influence the Reserve Bank’s monetary policy committee (MPC) to hike interest rates.
“Early” rate hikes, as he called them, were an important risk event because they would signal to the market the credibility of the MPC under governor Gill Marcus “as conservative, growth-central doves that are prepared to tighten policy and stick within their price stability mandate when needed”.
With the rand above R10 to the dollar and higher core and headline consumer price index figures likely through the second quarter, Montalto predicted a 200 basis point rate hike cycle over 18 months.
Iraj Abedian, the chief executive of Pan-African Capital, said there were two structural factors working against the currency. “One is the changing global monetary policy stance – the end of quantitative easing.”
There would be pressure on the rand and all the other currencies that had benefited from the US Federal Reserve’s quantitative easing programme.
The second factor was the structural balance of payments deficit. “We have over the past three to four years undermined our export capacity.”
At the same time the economy needed expansion of infrastructure, which required imports. This created a structural imbalance of payments, putting pressure on the currency. “This is not going to go away over the next quarter or three.”
He disagreed with Montalto, however, on rate hikes.
“Interest rates will not rise because there are not [significant] inflationary pressures at the moment… consumer confidence has diminished substantially and there is no exuberance in the economy to put pressure on inflation. Interest rates are unlikely to rise soon.”
Sanlam economist Arthur Kamp said the rand was undervalued.
“We know that it is cheap… at some point one would expect it to regain some value.”
However, in the context of the first steps being taken in the global environment, and the US in particular, to normalise its monetary policy, the focus would fall on countries that ran twin deficits – on the current account and budget.
Thus South Africa’s currency was likely to remain weak “for an extended period”.
Unless there was an unexpected fall to R11.50 to the dollar, it was likely rates would not rise. A fall to that level could ignite inflation expectations “and may prompt the bank to act”.
The MPC would also have to consider whether or not the consequent likely rise in inflation would be temporary.
Dennis Dykes, the Nedbank Group chief economist, said the rand did not start 2014 on a positive note. However, he believed the currency would start “pulling back” at some point.
“If the rand continues weakening through the year, interest rate rises may be on the cards,” he said. But if the rand pulled back some losses, as he suspected, “we may have another year of flat interest rates”.
National Union of Metalworkers of SA economist Neo Bodile could not be reached.
Solidarity economics researcher Piet le Roux said: “Should the current weakness of the rand continue and price inflation pressures continue to build, the [Reserve Bank] may be forced to hike interest rates this year.
“There is at best only illusionary growth under a weakening currency (through stimulation of exports). Solidarity would welcome moves by [the central bank] to contain such movements.”