South Africa’s fundamentals do not bode well for the rand: economists

Pressure on consumers, the return of load shedding and the dire fiscal situation and political uncertainties in South Africa paint a bleak picture for the rand, say Bank of America (BofA) economists, Rukayat Yusuf and Jure Jeric.

“Besides lower oil prices, waning consumer demand continues to drive import weakness,” the group said in a note on Friday (14 August).

In particular, imports of textiles and vehicles were down 53% and 40% month-on-month in June with machinery and equipment 64% lower. By contrast, oil imports fell 20%.

“We continue to see rising unemployment, electricity shortages, fiscal concerns and income losses weighing on consumption and the H2 recovery. High frequency data shows retail sales fell by 7.5% in June and 23% overall in Q2-worse than our expectations closer to 15%. We remain more bearish on growth, forecasting a 10.3% recession this year,” it said.

Impact on the rand

BofA maintains a bearish view on the rand, where its value is largely derived by movements in the US dollar, more than being tied to any local measures.

“The dire fiscal situation and political uncertainties (in South Africa) are here to stay. Furthermore, easy monetary policy and low carry are likely to additionally weigh on the currency,” it said.

This is underlined by its baseline that South African will see a 10.3% contraction in GDP in 2020, with only a 25 basis point cut to rates left on the cards for the rest of the year.

“Even from the comparative general emerging market perspective, South African macro fundamentals do not bode well for rand exchange – it’s one of the countries with the largest public debt and negative fiscal balance,” it said.

BofA said that its estimates put the fair value of USD/ZAR to be around R18.00.

“Furthermore, ZAR is 15% overvalued on the trade-weighted basis. The main short-term risk to the bearish ZAR FX view is the USD debasement and a prospective catch up of EM high beta currencies which haven’t benefited from the recent USD weakness.

“In such scenario, ZAR FX rally would be primarily a reflection of the risk sentiment and USD,” it said.

A more positive view

Bank of America’s stance runs counter to local views, particularly that of the macro economics team at Absa, which believes the rand will recover further into year-end, despite a slip in recent sessions.

Absa senior economist Peter Worthington, said in a virtual round-table discussion on Wednesday (5 August), that the bank’s peer model implies that the the local unit remains significantly undervalued relative to other high-yielding and commodity-based currencies.

And, from a purchasing power parity basis, the rand could strengthen by 8% before the exchange rate would become ‘uncompetitive’, he said.

“Therefore, we still expect the local currency to strengthen to R16.00/USD by quarter-end, before reaching R15.75/USD by the end of the year – which is now the most bullish rand view in the market,” he said.

Read: Why Absa is bullish on the rand – and where it sees the currency by year-end