Jeff Schultz, senior economist at global bank BNP Paribas South Africa, says that while he expects 2020 to be another gloomy year for South Africa’s economy, he is bullish on the performance of the rand up to the end of 2021.
Speaking at a BNP Paribas quarterly economic update event at Melrose Arch in Johannesburg on Monday (10 January), Schultz said that he expects the rand to strengthen to R14.30 against the dollar by year end, and to R13.75 by the end of 2021.
The economist cited global liquidity, which is supportive of high yielding currencies like the rand.
The local unit has endured some weakness in recent sessions, and is back above R15.00 against the greenback amid concerns over the extent and global ramifications of the mushrooming coronavirus outbreak.
Schultz stressed that rand volatility will continue in 2020 due to a number of factors including continued electricity outages which could shave off as much as 0.3pp to the group’s already sub-consensus 2020 GDP growth estimate.
“Assuming that H1 2020 could see a minimum of 15–20 days of stage 2 load-shedding, we estimate this could shave a further 0.3–0.4pp off growth, which prompts us to lower our already sub-consensus GDP growth forecast to just 0.5% from 0.8%.”
BNP Paribas said that a Moody’s downgrade is likely in 2020, although perhaps not as early as some anticipate.
Schultz said that Moody’s has indicated that March – (27 March expected date for a periodic review) – may be too early to judge South Africa’s progress. Moody’s will look to the 27 February budget review for details on how the government intends to ignite growth.
“We expect February’s national budget to announce substantial cuts and to look better than the October 2019 MTBPS (from FY20/21 at least). However, the budget is likely to fall short of being able to reduce non-interest expenditure to the tune of 3% of GDP, as initially indicated by the finance minister.
“In addition to the disappointing budget, we expect Moody’s to become more concerned over the slow pace of economic reform up to now, particularly in the context of likely acute electricity supply shortages in H1 2020. This is likely to see South Africa’s per capita GDP contract for at least the next two years, we think,” BNP Paribas said.
It said that it does expect Moody’s to downgrade the country, possibly in August.
However, it believes the downgrade is already priced in and that the likely Moody’s downgrade is already relatively well discounted by markets, owing to the following:
- the significant steepness already reflected in the local yield curve;
- the fall in foreign holdings of locally denominated local debt from a peak of 43% of total holdings in mid-2018 to 36% in Q4 2019;
- already substantial portfolio outflows from both the local bond and equity markets (collectively around 3.5% of GDP) over the past 18 months.
“Notwithstanding a possible Moody’s downgrade this year, we expect a helpful global liquidity backdrop to remain broadly supportive of the domestic bond market in 2020,” BNP Paribas said.
It said that the economy is unlikely to escape downgrade scot-free, however. “We think a sovereign downgrade by Moody’s would knock business and consumer confidence further.”
It said that knee-jerk credit downgrades for local banks would also be likely to weigh on an already stagnant economy.
BNP Paribas’s view on the rand is somewhat more bullish than most other forecasts in the market.
Nedbank analysts said in a recent note that the recent sell-off is a reminder of its vulnerability to adverse shocks (local or international) as the country’s fiscal and growth concerns remain in place.
The group has a mid-year target of R16 against the dollar, while in November last year it said, “we would not be surprised to see the currency weaken towards R17.00 against the USD before it stages a recovery to below 15.00 as we head into 2021 and 2022.”
Turning back to fears around the coronavirus outbreak, Nedbank analysts believe the rand will recover some lost ground once equity markets are more comfortable with the potential risk of the pandemic.
This aligns with Absa’s views published in January, with the bank’s analysts predicting that the rand will likely to reach R15.16 against the dollar by the end of the first quarter, reaching R16.13 by year-end.
Absa said that it expects the rand to be particularly vulnerable to capital outflows during the first half the year because it believes Moody’s is likely to downgrade South Africa’s local currency credit rating in March, which in turn will eject South African Government Bonds (SAGBs) from the World Government Bond Index.
An additional event, which hasn’t generated much attention, it said, is that JP Morgan is scheduled to further reduce South Africa’s bond weighting within its emerging market bond index during the first half of 2020.
“The rand could actually weaken by more than we expect if the SARB cuts policy rates by more than the market currently expects and/or the economy falls back into recession,” Absa said.
By comparison, Bank of America (BofA) is relatively bullish on the local currency and forecast that it will trade at R14.85 over the next 12 months.