Despite negative perceptions about the movement of the rand exchange rate, the currency has appreciated steadily since the third week of January last year.
The rand traded at R16.86 to the dollar on January 20 last year. On the same day, the rand reached its weakest level of R18.42 to the euro last year. Against the pound, the rand traded at its record low level of R24.19 on January 11, 2016.
The currency, however, recovered sharply to close at R13.73 to the dollar on December 30. This implied an appreciation of 313c or 18.56 percent. Against the pound the rand recovered with 666c (27.5 percent) to R17.53 and against the euro by 394c (21.4 percent) to R14.48.
The reasons for the steady strengthening of South Africa’s currency started with the “disciplined” budget by Finance Minister Pravin Gordhan last February. The assurance of three rating agencies not to downgrade the country’s sovereign debt to junk in May and June and again in November and December also boosted sentiment towards the rand.
Also bolstering the currency was the steady increase in the country’s real export rate, which helped the trade account deficit to shrink to only R14.61 billion over the first 11 months of last year, against the R59.28bn recorded in the same period a year earlier.
Despite negative geo-political sentiment, a steady increase in the purchasing of bonds and shares by foreigners also played its role towards returning the rand exchange rate to its long-term real rate of exchange that arguably is more around R11 to the dollar.
Globally, the US Federal Reserve abstained from increasing its repo rate until December.
The Brexit vote in favour of the UK leaving the EU also contributed to a weaker pound and higher demand for emerging market currencies.
The steady increase in global commodity prices, especially during the last quarter of last year, and improved growth prospects for the Chinese economy, also supported the rand.
During the first six weeks of this year, the rand has appreciated against the US dollar by 74c, or 5.4 percent to R12.99 on February 16, with 71c, or 4.2percent, against the pound sterling to R16.24 and with 61c, or 4.3 percent, against the euro to R13.87.
Many analysts have questioned the rand’s consistent recovery.
Risks
“Given that both economic and political risks for South Africa during 2017 are far more less for foreign investors as well as the upturn in the economic cycle, the rand exchange rate should continue to appreciate steadily,” said Dr Chris Harmse, an economist at Rebalance Fund Managers.
According to Harmse the following factors are likely to support the further strengthening:
Expected economic growth: Economic growth this year will reach a level of around 1.4 percent. This is three times higher than the expected rate of 0.4 percent last year;
A steady increase in the prices for commodities as world economic growth is expected to increase from around 3percent last year to between 4.5 percent and 5 percent this year;
Despite efforts of less trade with China by the Trump administration, it is expected that China will obtain and maintain an economic growth rate of 6.7 percent this year;
The effect of a well formulated national budget this month. It is expected that the national budget deficit will remain around 3.2percent of gross domestic product and that a budgeted deficit of 2.8 percent in 2017/18 and 2.5 percent in 2018/19 will be put in place;
Improvement in the deficit of the current account of the balance of payments;
Steady improvement in the inflation rate to levels of around 5 percent at the end of this year;
Decrease in interest rates during the end of 2014;
And Improved summer crop that will lead to exports at improved world prices;
Downside risks for the rand exchange rate, however, still exist that will prevent the rand to move towards its real effective level of near R11 to the dollar.
Some economic risks that will lead to a weaker rand:
- The effect of the proposed three-time increase in the US bank rate by the Fed;
- The effect of the fiscal and trade stimulation of the Trump administration;
- The effect of Brexit on UK, European relations and economic performances as well as on South African trade;
- A possible cabinet reshuffle.
Another development, investors will be watching is the news reported by IOL on Friday that Eskom’s former chief executive, Brian Molefe, is on his way to Parliament after the institution confirmed that he will be sworn in as an MP.
Read also: Will Molefe oust Gordhan?
This has widened speculation that Molefe would take over from Pravin Gordhan as finance minister in the next few weeks, or is it days?
Parliament only confirmed: “We wish to acknowledge the nomination of Mr Brian Molefe, to fill a vacancy on the North West list of ANC MPs, which is depleted”.
National Assembly Speaker Baleka Mbete is yet to decide the date for Molefe to be sworn in. When this happens, the rand will be significantly affected.
Editor’s Opinion: Molefe might be the new Minister of Finance sooner than later.