Rand eyes move below R12 vs the dollar after Reserve Bank revises growth forecast
The rand firmed in morning trade against the dollar on Friday after the Reserve Bank revised its 2018 forecast for growth in gross domestic product (GDP) .
The central bank’s Monetary Policy Committee maintained the repurchase rate at 6.75 % Thursday, for a third consecutive meeting, and in line with the estimates by all but seven of the 20 economists surveyed by Bloomberg.
The SARB revised its forecast for GDP growth up from 0.7% to 0.9% for 2017; while forecasts for 2018 and 2019 were adjusted to 1.4% and 1.6% respectively, up from 1.2% and 1.5% previously.
By 07h45 on Friday morning, the rand held firm against a weaker dollar – trading at levels last seen in mid-2015, having climbing more than a percent following the rate announcement.
- Dollar/Rand: R12.11 -0.10%
- Pound/Rand: R16.84 -0.50%
- Euro/Rand: R14.84 -1.35%
Bloomberg reported that inflation has been inside the target band for eight months and the rand – among the world’s most-volatile currencies – has strengthened since the ruling party elected deputy president Cyril Ramaphosa as its new leader in December, spurring hope that policy uncertainty and political turbulence will dissipate.
“We do see an improved inflation and growth outlook thanks to a stronger performance in the currency but a lot of risk factors still exist, both on the political front as well as on the credit-ratings front,” Jeffrey Schultz, BNP Paribas’s senior economist told Bloomberg.
S&P Global Ratings and Fitch Ratings cut the country’s debt to junk in 2017, and a reduction of rand bonds by Moody’s Investors Service could trigger an exclusion of the country’s rand debt from Citigroup Inc’s World Government Bond Index.
The effect of this on rand bond yields “could be significant, but the extent to which a universal downgrade is already priced in remains unclear,” Governor Lesetja Kganyago told reporters. The government’s challenge is to “find ways to finance the deficit in a growth-positive manner, and at the same time convey a credible commitment to structural reforms.”
The bank expects inflation to remain within the target band of 3% to 6% until at least the end of 2019, reaching a low of 4.4% in the first quarter of this year.
“Inflation forecasts are low enough and if they materialise then there is enough scope to cut,” said Elna Moolman, an economist at Standard Bank. But “we are confronting very significant currency risks, which could impact on the inflation forecast.”
Busisiwe Radebe, an economist at Nedbank Group told Bloomberg that the Reserve Bank has decided to take a wait an see approach. “Implicit in what the governor was saying is that the bank doesn’t think the strong rand is going to remain this way for a very long time. Rates are going to stay flatter for longer.”
Bianca Botes, corporate treasury management at Peregrine Treasury Solutions said the rand may have some difficulty breaching lower technical levels. “The MPC has highlighted that there are some key risks remaining within South Africa, even though positive sentiment has been restored by the election of Cyril Ramaphosa as President of the ANC.
“The financial situation of the State Owned Entities (SOEs) is one of the country’s biggest concerns, with Eskom remaining particularly in focus. The question of where funding will come from to address SOEs financial difficulties, and the pressure that this will put on the fiscus moving into 2018 is one of the primary concerns that we will need to watch closely this year,” Botes said.
Reporting with Bloomberg.
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