Johannesburg - The hard hit South African currency is set to fall even further as investors shy away from emerging markets and the US Federal Reserve seems certain to hike interest rates for the first time in a decade later this month.
If Chris Hart, global investment strategist at Standard Bank Wealth and Investment, is correct, the embattled currency could hit as low as R18 to the dollar in 2017, and even worsen to R30 to the greenback under certain circumstances.
The rand’s recent fall - to an almost record low of R14.46 during Monday - was driven by dire warnings from ratings agencies, with Fitch dropping the sovereign rating to a notch above junk status, in line with Standard & Poor’s, which revised its outlook to negative.
Over the past ten years, the local currency has moved from a monthly average of R5.96 in January 2005 to an average R13.66 in September this year. This translates to the currency having lost just more than half its value.
Chris Gilmour, an analyst with Barclays Africa Group Wealth and Investment Management, notes the rand is not trading anywhere near parity as it should now be trading at about R8 to the US currency.
“At its its current level of around R14 to the dollar, it is at a huge discount to theoretical value.”
Gilmour notes the rand has been falling in tandem with all other emerging market currencies this year, and that trend is likely to continue as the dollar strengthens.
Sasha Naryshkine,an analyst at Vestact, says most of the rand weakness has been led by dollar strength, and it is no surprise that the dollar Index is at a multi-year high.
Naryshkine adds a stronger dollar generally translates into weaker commodity prices, which is bad news for commodity exporting nations.
“In what is looking more like an oversupplied market, commodity price weakness might continue to translate to weaker commodity exporting nations’ economies, and by extension, their currencies.”
Naryshkine says SA could always try harder, attract more capital and be more business friendly, which would help create higher revenues for government and lower borrowing costs.
South Africa’s high level of debt is already a cause of concern for economists, and many expect the trade deficit to widen this week when the latest figures are reported.
Gilmour points out that hart has indicated the rand will hit R18 to the dollar by 2017 and, if the government has to approach the International Monetary Fund for a bailout, the currency could fall to R30. Hart could not immediately be reached to confirm this comment.
Warwick Lucas,CIO of Galileo Asset Manager, explains SA’s localised risk lies in the countries credit rating and politics. Lucas adds SA’s economic policy needs reform. “A world is awash with capital from a global savings glut looking for only half decent investments, yet our fiscal policy is not sufficiently welcoming.”
South African Reserve Bank governor Lesetja Kganyago noted in his November 19 statement after the Monetary Policy Committee meeting that saw repo rates hiked that the rand has “been particularly volatile, even compared to its peers, as domestic factors also impacted on the currency”.
“The extent to which Fed tightening has been priced into the exchange rate remains uncertain.”
IOL