What happened to the predictions of R19 to the dollar at the end of 2016?
2016 was riddled with predictions of gloom and doom in the South African economy following the shock firing of Nhlanhla Nene from the finance ministry – but in the end, the year came to a flat conclusion – and a far stretch from the extremes that were expected.
Several analysts and economists had a bleak outlook for South Africa in 2016, and while many of the predictions came true – growth was low, unemployment remained high, and the political landscape, while turbulent, saw practically zero movement – the rand’s level versus the dollar was a miss.
In its 2016 outlook, research analyst firm Nomura pegged the rand at R19.00 to the dollar by the year’s end – this off the back of the fresh news that Nene had been sacked. The prediction was understandable at the time, given the impact of the move, and was the end of a realistic scenario for the country.
Read: Get ready for R16, R17 or even R19 to the dollar this year: economists
However, during the course of 2016, things gradually changed and shifted – and so too did the predictions. As finance minister Pravin Gordhan was chased by the Hawks on fraud charges, the rand took a hit – but as global politics played out (Brexit in the UK, Trump in the US) the rand would also recover.
Nomura, too, shifted its expectations from R19.00 to the dollar, down to R17.00 to the dollar, and finally to R14.75 to the dollar – but even this was off the mark, with the rand finally closing around R13.73 at the end of the year.
What went wrong?
The problem, Nomura said, was not in the analysis modelling that was at fault, noting that the model used provided room for a number of scenarios to take place (with the rand ranging from a best-case close of R12.81 to the dollar, to R19.00 or worse), but rather which scenario was deemed the dominant narrative for the year.
And while it eventually brought its rand forecasts in line with the reality, the group conceded that it was not quick enough to adapt its forecast to the ever-changing state of local and global events.
“Put simply, (the rand predictions) were driven by four Fed hikes still forecast at that time and a lack of Emerging Market carry rally for the year – which we spun into a narrative that South Africa politics and ratings issues would be a focus for the market and drive ZAR weaker through the year.”
“If the market had focused on these factors, and we had had that number of Fed hikes, rather than just one, we may well have ended up at 19.00,” the group said.
In November 2016, Nomura revised its forecast to a year close at R14.75 to the dollar – but says this should have happened a lot sooner, using more positive scenario references from the start of the year.
“We became wedded to a view that the politics and ratings narratives would ultimately burst through even an EM carry rally – which with hindsight was wrong. Instead, markets focused on the positives and skewed the narrative to fit the carry rally.”
This was again reflected by ratings agencies giving South Africa the benefit of the doubt and keeping it above junk status (another factor that would have counted towards a R19 to the dollar level) – and the biggest risk of finance minister Pravin Gordhan getting the chop also did not materialise.
Nomura’s outlook for 2017 is far more muted – without the shocking conclusion to 2016 that was experienced at the end of 2015 to frame the year. The group predicts that the rand will weaken in 2017, with low growth and a turbulent political climate leading to a finish at around R15.50 to the dollar.
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