The economic outlook, both globally and locally, is expected to continue to improve on more positive developments pertaining to Covid-19 vaccination, says Nedbank.
In a research note on Monday (7 December), the bank said that this will support investor sentiment and drive financial assets into emerging markets with relatively higher yields as major countries are not likely to start tightening policies soon.
“South Africa will be one of the beneficiaries, which will support the rand and put the Reserve Bank in a better position to accumulate reserves, while gold reserves will continue to benefit from precious metal’s safe-haven status,” it said.
“However, the pace of financial inflows will be undermined partly by the country’s poor sovereign risk ratings, while the level of reserves’ import cover will be reduced by a higher import bill, which would be pushed up by a revival of local demand for capital and durable goods.”
Nedbank said that global forces will be supportive of further rand appreciation, with rock-bottom interest rates in advanced countries, ample global liquidity due to aggressive quantitative easing, and a recovering world economy likely to drive risk appetites and capital flows to most emerging market economies.
“We still the think that bad news from the domestic front has been largely priced in, but the risks of further ratings downgrades remain high as both Moody’s and Fitch left South Africa on negative outlook.
“The next move down the ratings scale will hurt, with South Africa then joining Argentina and other nations notorious for chaotic defaults.”
Nedbank said that the rand is still about 7.5% undervalued based on purchasing power parity, but the margin has narrowed substantially over November.
“If one allows for South Africa’s considerable structural imbalances and underlying inefficiencies compared with our trading partners, the rand is probably at or very close to fair value.
“The Institute of International Finance highlighted in a recent research note that the rand is overvalued relative to the US dollar. However, the rand tends to overshoot on the way down and up. Given this, further appreciation is likely over the short to medium-term.”
Positive signs for the economy
With Statistic South Africa set to launch its Q3 GDP on Tuesday (8 December), Nedbank said that recent economic news has been encouraging, reflecting a stronger-than-expected bounce back in output and sales over the third quarter.
The recoveries, in mining and manufacturing output, gathered pace over August and September, while some upward momentum also emerged in retail sales over the same period, it said.
New vehicle sales also climbed higher, but at a softer pace over August to November.
“At this stage, the economy is forecast to post growth of around 51% q-o-q (annualised) in Q3. This bounce-back mainly reflects some normalisation off the extremely low base created by level 5 lockdown in April.
“Provided the economy is not subjected to another level 5 lockdown, the recovery should continue at a more moderate pace in Q4 and beyond, supported by low-interest rates, some employment growth and the normalisation of economic activity across the globe.”
Nedbank said it has revised its real GDP forecasts for 2020, 2021 and 2022 to -8.1%, 3% and 2.2% respectively – from -9%, 2.7% and 2.1% previously.
At these growth rates, South Africa will return to 2019 output levels by 2024. A better outcome is only possible through significant policy and structural reforms, it said.