Economist Cees Bruggemans says that concerns about South Africa’s growth may not be successfully addressed over the next two years – sending the rand to a value of R25 versus the US dollar.
“The year is only six weeks old, and we have already enough earth-shaking events to mark a decade. It means the extreme scenarios get a greater look-in,” said Bruggemans of Bruggemans & Associates, Consulting Economists in a newsletter on Monday.
During the State of the Nation Address last week, president Jacob Zuma acknowledged the country’s economic challenge.
“Global growth still remains muted. Financial markets have become volatile. The currencies of emerging markets have become weak and they fluctuate wildly.”
“The International Monetary Fund and the World Bank predict that the South African economy will grow by less than one percent this year. The lower economic growth outcomes and outlooks suggest that revenue collection will be lower than previously expected.”
The rand has settled below R16 against the dollar in recent sessions, having hit a record low of R17.99 on 11 January, after Zuma defended his well documented appointment blunder within the finance department.
In late afternoon trade on Monday, the rand traded at R15.83 against the buck.
Taking an optimistic view, Bruggemans said that the rand could trade in a range of R10-R15 against the dollar should ‘global realities and domestic actions ease’.
Arguing in favour of positive local currency is the reality facing the US Federal Reserve, the economist said that while the US economy continues to grow, the global realities keep eroding its growth and inflation prospects as markets err on the side of caution.
“This is encouraging some players to believe the Fed will remain on hold through 2016-2017, meaning no further rate hikes for now.” That would mean a less aggressive dolla, which in turn, would be rand friendly should everything else remain the same.
“Unfortunately, everything else is hardly likely to remain the same,” Bruggemans said noting events in China as well us those in South Africa.
China is engaged in a long-run transition, away from export-led to consumption-reliant. This is accompanied by radical shifts in commodity demand (as already seen so far) but also inviting decoupling of Yuan from the Dollar, the economist said.
He said that global suspicion about China is likely to remain in the market’s thinking for some time. “For risky, fragile emerging markets like South Africa, this is a source of potential instability.”
Bruggemans said that the main domestic question is not next week’s budget, which he said will move goalposts, cutting public spending, raising taxes, and cutting the deficit meaningfully by 1% to 2% of GDP.
The economist noted that the recent rand clawback and oil stabilizing are translating into a slate over-recovery of well over 50 cents per litre for petrol. This, he said presents an ideal time for finance minister Gordhan to raid the fuel levy by 150 c/l and collect nearly R40 billion more in a full year.
“There will presumably be some asset financing attempts, at least displacing some budget infrastructure outlays with private financing participation.
“Taken together, the spending curtailment, tax burden increase and asset funding displacement should create scope to decidedly cut the budget deficit, to the satisfaction of markets and rating agencies,” Bruggemans said.
This, he said, should remove some of the rand risk premium, favouring the R10-R15 range against the dollar.
However, he warned that the growth imperative may ultimately not be successfully addressed.
He said that while reducing the budget shortfall aggressively via spending curtailment and asset funding displacement should get the global nod, too little change to the overarching political paradigm will raise questions longer term, and therefore lead to junk status for the country.
“That’s the difference between falling into the R15-R25 range as compared to the R10-R15 range.”