Over the next 10 years the rand will spend most of its time between R10 and R14 to the dollar. Major and outlandish events such as war, a change in political regime, discovery of new minerals, a complete turnaround in productivity, or the unlikely collapse of the US or Chinese economies could toss this opinion right out of the window – the unexpected should be expected.
But given the current path of the world economy, the rand is likely to stay in a relatively depreciated state but will not tumble to catastrophic levels.
This year will be tumultuous and it will have little to do with the elections; when it comes to movements in the rand, South Africa is a rather small player. The elephant in the room in 2014 is the tapering of the Federal Reserve’s policy to inject more than $60 billion (R664bn) into the US economy each month. The proposed relative decrease in the supply of dollars will cause the dollar to strengthen and, therefore, all other currencies to depreciate against it.
Most emerging market currencies have already lost between 10 percent and 20 percent since the Fed first announced its intention to slow down its buying last year, and investors are worried that poor performance in some emerging markets will be contagious and carry over to others.
In addition, nobody can be sure how much of the effect of tapering has already been priced into the market. That is, investors don’t know whether other investors – knowing that the dollar will appreciate – have let go of emerging market currencies to buy dollars in anticipation of the appreciation. When tapering does happen, nobody can be sure of whether the dollar will move or not.
It is only this kind of speculative, panic behaviour that is likely to cause the rand to fluctuate violently and reach levels of R14 to the dollar. But speculation is quick to correct itself and the rand will soon return to a value more representative of the South African economy.
The fair value of the rand should dance around the R10 to R11 a dollar level. The deficit on the current account is a concern, but not one significant enough that we can start thinking of catastrophic slides in the currency or economy. Productivity, especially that of labour, is hampering output and exports in the manufacturing and mining sectors, both important sources of foreign currency and the maintenance of the strength of the rand; neither are doing well.
While I remain hopeful for long-term changes in productivity as the economy matures, the medium term will show slight deterioration and will prevent the rand from breaking below the R10 a dollar mark once the storm around Fed tapering has calmed.
While much noise is made about currencies during election time, the poll is unlikely to have much effect at all. The bottom line is that currencies only change if money moves; elections do not change the trade balance in the short term, and major investors are more than accustomed to the political drama that surrounds an election year. Only in the case of a major upset in the results, such as an opposition political party taking over power, will we see significant movements of investment money in or out of South Africa this year.
Over the next 10 years, the rand will stay weaker than we are used to. But if it doesn’t fluctuate too hysterically and industry can adapt, it may be exactly what the South African economy needs.