How the rand could perform against the dollar over the next 3 years

All three of major credit ratings agencies have weighed in on South Africa’s financial future, with only Moody’s opting to take a “wait and see approach” ahead of the ANC’s December conference.

On Friday (24 November) ratings angecy S&P Global downgraded South Africa’s local currency debt to junk status, making it the second agency after Fitch to declare the country as full junk. Moody’s put the country on review for downgrade, to be assessed after the budget speech in February 2018.

The S&P downgrade had an immediate impact on the rand, with the currency weakening almost 2%, to R14.11 against the dollar over the weekend.

However, many analysts said that ratings downgrades had already been priced in for some time, and as such the rand’s weakness is expected to slowly manifest over the coming months and years instead of in a single blow.

In the immediate term, this means that the rand is likely to see a slight boost or loss depending on whether or not the “market-friendly” Cyril Ramaphosa is elected as the ANC’s new leader in December, before slowly regressing as other market factors take their toll.

This was the sentiment expressed by Absa’s Global Investments & Solutions (GI&S) which has published its currency forecast over the next three years, as part of its October report.

The report is compiled by Absa’s Asset Allocation Committee, which regularly assesses the need for strategic and tactical adjustments to pre-existing allocations, based on short- to medium-term risk and return expectations.

“During the October 2017 Medium-Term Budget Policy Statement (MTBPS), South Africa’s Finance Minister Malusi Gigaba demonstrated less than satisfactory policy guidelines in balancing fiscal discipline and resuscitating economic activity,” it said.

“To this end, markets have swiftly begun pricing in a benign economic trajectory, with an expectation of suboptimal expansion rates over the next three years.

“Undershooting economic growth targets while indicating low levels of commitment toward fiscal consolidation, is a condition likely to induce more struggles in fending off further credit rating downgrades.

The report also warned of high meat price inflation and upward pressure in global oil prices, which was likely to affect South African petrol prices.

Currency forecasts

All forecasts are reflective of rand spot prices taken in the first week of November 2017.

ZAR/USD ZAR/EUR ZAR/GBP
Spot  14.20  16.77  18.76
1 month  14.27  16.88  18.86
3 months  14.44  17.14  19.11
6 months  14.67  14.49  19.45
1 year  15.14  18.26  20.20
2 years  15.89  19.64  21.47
3 years  16.89  21.38  23.12

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

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How the rand could perform against the dollar over the next 3 years