The rand continues to be a major loser during the Covid-19 coronavirus outbreak, left to flounder in the wake of the choppy, and often violent waters created by the pandemic.
The rand has already weakened a great deal – to its worst ever levels against the dollar, and pound – but is likely to recover once the pandemic is under control.
The Covid-19 pandemic has created a much harsher global backdrop for South Africa, which faces an economic calamity post lockdown, notes Absa in a new research document.
In a global context of severely weakened global activity, collapsed commodity prices and heightened risk aversion will greatly challenge the country, even before accounting for the domestic costs of fighting Covid-19, it said.
A global recession is now likely in 2020, with only a slow recovery thereafter. And with South Africa’s massive budget deficit, a world of sharply less capital inflows will be a big blow, the financial services group said.
Absa forecasts that GDP will contract by 6.4% in 2020, “but we caution that this forecast, like all others right now, has more than the usual degree of uncertainty and downside risk”.
It pointed out that its forecast is very close to the SA Reserve Bank’s forecast that GDP would contract 6.1% this year, and the IMF’s projection of a 5.8% contraction.
In the short term, the rand remains susceptible to heightened levels of risk aversion associated with lingering Covid-19 fears, Absa said.
It said that rating agency, Moody’s latest downgrade of the country’s credit rating to sub-investment grade should also keep the rand on the back foot over the coming weeks because World Government Bond Index (WGBI) trackers could still offload between $2 billion – $8 billion worth of South African government bonds (SAGBs) by the end of April.
Equity inflows are also likely to remain scant unless South Africa is able to avoid a protracted recession, Absa said.
“That said, the trade-weighted rand remains 17% undervalued on a purchasing power parity basis and our peer model implies that the rand is oversold relative to its high-yielding and commodity-based currency peers,” the financial services group said.
“The fact that this year’s rand weakness could oblige local asset managers to repatriate some of their offshore holdings in order to stay within prudential limits, should also be conducive to a rand recovery over the coming quarters.
“Specifically, we expect the rand to be at R18.00/USD by mid-year before strengthening to R16.40/USD by the end of the year,” Absa said.
The local unit traded at the following levels against the major currencies on Tuesday:
- Dollar/Rand: R19.02
- Pound/Rand: R23.38
- Euro/Rand: R20.62
Given such a difficult forecasting exercise, it is important to be clear about the key input assumptions, Absa further pointed out.
The most important ones, which have changed substantially from our last forecasting round in January, are the following:
- A weaker exchange rate, with USD/ZAR hitting R18.00 by mid-year, and recovering to R16.40 by end-2020, as opposed to R16.13 in its last baseline forecast that Absa ran in January;
- A G7 recession of 4.0% in 2020, compared to growth of 1.5% in our last baseline forecast, and
- Chinese growth of 1.1% in 2020, compared to 5.8% in its last baseline forecast.