What the rand could look like vs the dollar in 2018 – and it’s not good

The rand firmed for a third consecutive session against the dollar on Tuesday – trading at R14.66 by 14h20.

Analysts say that the unit’s strength comes amid dollar weakness, while South Africa’s consumer confidence index recovered from near 14-year lows in the first quarter, data on Tuesday showed.

The rand has been resilient so far in April following a ruling by the Constitutional Court that President Jacob Zuma violated the constitution by not honouring an order to pay back state money spent on his private residence in Nkandla, Kwa Zulu-Natal.

Economist Cees Bruggemans said in a note that the currency is not out of the woods just yet, and could look vastly different by 2018.

“South Africa faces many potential risks through 2018, nearly all unfavourable regarding rand, inflation, growth and interest rates, though some positive outcomes are possible,” Bruggemans said.

He said that the main risks point to US Fed policy normalisation, which will lead to dollar strength, while further bad news out of China would likely lead to further commodity price weakness.

Internally, South Africa is also likely to face a rating downgrade to junk, a third year of drought, while the political arena will continue to put a strain on business confidence and investment.

According to Bruggemans the highest probability can be attached to a rating downgrade, dollar strength, and a weakening political landscape.

“Even if we succeed in reasoning away some risk, or even succeed in turning it into modest positive outcomes, the balance of negative risks seem bad enough. It is the degree to which these could still become activated that should worry most,” Bruggemans said.

The economist said that for all risk factors to play out isn’t inconceivable, and would likely lead to negative growth – though not as bad a Brazil at -4%.

Such a scenario would see the rand in R20-R30 territory – uncharted territory not offering any hard guidelines,- and inflation spiking into 8-9% territory, and SARB ready and willing to double up with a further 200 point rate hikes.

He said that South Africa could hope for ‘a political breakthrough’, mildly improved commodity prices and help from the US Fed, to steer clear of negative growth.

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What the rand could look like vs the dollar in 2018 – and it’s not good