What will happen to the rand if Ramaphosa, Dlamini-Zuma or Mkhize comes out on top in December

With ratings downgrades and the possibility of new leadership in the ANC on the horizon, analysts have already begun warning that the rand is likely to take a significant knock in the coming weeks. However the situation may not be as bad as previously thought.

This is according to Bank of America Merrill Lynch (BofAML) analyst Ferhan Slaman, who was cited by PoundSterlingLive on Tuesday.

Slaman said that the majority of risks have already been priced into the currency, meaning a major slide in the rand is unlikely. This includes things like the possibility that South Africa will be downgraded to full junk and that investor-unfriendly Dlamini-Zuma comes into power after the ANC’s December conference, he said.

“Our negative view on SA this year is now largely priced in from a 3-6 month perspective, potential short-term overshooting notwithstanding,” said Slaman.

“The rand (ZAR) is already the weakest of the emerging market currencies, suggesting it could be ‘undervalued’, and making it unlikely it could stretch much further down. ZAR is the worst-performing EM currency this year and has now reached our end-year forecast at 14.50, which we held since the 2017 year-ahead.”

The analyst provided a breakdown of where the rand could go, depending on the outcome of the ANC conference – specifically, what could happen if Dlamini-Zuma, deputy president Cyril Ramaphosa, or ‘compromise candidate’ Zweli Mkhize heads up the party.

The below forecasts are based on USD/ZAR exchange rates only.

Dlamini-Zuma

While showing further rand weakness, it would not be catastrophic for the currency if Dlamini-Zuma comes into power, said Slaman.

In this scenario BofAML expects the USD/ZAR rate to move from the current R14.10 level to R14.50 by the end of 2017.

This will be followed by R15.00 by end of 2018 and R15.40 by end of 2019.

Ramaphosa

Slaman said that the least likely scenario would see Ramaphosa elected to power in the December conference.

According to the forecasts Ramaphosa is the most market-friendly outcome and would see the USD/ZAR rate at R13.30 by end of 2017.

However, BofAML still expects the currency to weaken due to global factors – dropping to R14.50 by end of 2018 and R15.00 by end of 2019.

“Difficulties around fiscal consolidation and structural reform, coupled with global factors (US tightening, slowing EMs) would offset the initial improvement in domestic sentiment,” said Slaman.

Mkhize

Seen as the “comprise” choice by many analysts, Zweli Mkhize is also likely to split the difference in how the rand will be affected by his appointment.

BofAML forecast that his appointment would likely to lead to an exchange rate of R13.80 by the end of 2017.

It would then rise to R14.80 by end of 2018 as Mkhize comes under increasing pressure from the Zuma camp to adopt their policies, said BofAML – eventually ending 2019 at R15.40.

Read: How much the rand could lose against the dollar if SA is downgraded on Friday