“The interest rate differential between the Fed\u2019s funds rate and SA\u2019s repo rate has widened to 4.75%, with a narrow differential a key driver of rand weakness. Indeed, the rand moved substantially away from fair value as the US-SA interest rate differential narrowed from March last year, falling to 2.50%.”<\/p>\n\n\n\n
Bishop said this is important because South Africa has not kept up with the scale or speed of the US’ interest rate hikes, and so the resultant negative ‘real’ return for investors disincentivises them – especially given the risk premium attached to South Africa.<\/p>\n\n\n\n
“A margin or buffer is needed between SA and US interest rates, as investing in US interest rate bearing assets is seen as risk-free while SA is perceived to have substantial risks attached to investing in its interest rate bearing assets,” she said.<\/p>\n\n\n\n
South Africa’s monetary policy has become restrictive since the 50 basis point rate hike in May, and the ‘real’ interest rate has moved towards the neutral level – but there are still “severe concerns” around economic growth in South Africa, and the future health of government finances.<\/p>\n\n\n\n
This is worrying investors, keeping the rand weak.<\/p>\n\n\n\n
Meanwhile, movements in the dollar and the US Fed’s communications around interest rates are also key factors, Bishop said. More recently, it’s these communications which have kept the rand volatile. <\/p>\n\n\n\n
“The domestic currency is likely to remain volatile over this quarter and the next. The Fed has indicated current expectations of two more interest rate hikes, but this is not set in stone,” she noted.<\/p>\n\n\n\n
As with previous outlooks, Investec has five key scenarios – factoring in various circumstances and indicators – that lay out where the rand could be heading over the near and longer term.<\/p>\n\n\n\n
The group’s baseline scenario – with a likelihood of 46% – is that South Africa’s economy remains weak, but lifts to 3% over the medium term, lifted by reforms, and natural to positive global economic risks.<\/p>\n\n\n\n
In this scenario, the rand stabilises and then lifts; inflation is impacted by adverse weather conditions, but there is a slow move away from fossil fuels. Investec sees the rand averaging R18.75 to the dollar in the second quarter of 2023, strengthening to R17.90 by the end of the year.<\/p>\n\n\n\n
The group’s other scenarios are variations of this. The next most likely scenario is the “Lite down” case (42%), where the current conditions deteriorate enough that the rand tanks to R19.70 be the end of the second quarter and falls further to R20.90 by the end of the year.<\/p>\n\n\n\n
Other scenarios are less likely – particularly the upside scenarios, which the bank sees a slim chance (1%) of ever happening. The extreme downside has a 10% chance of happening – where the rand closes the year at R22.30 to the dollar.<\/p>\n\n\n\n
The graph below outlines Investec’s projections for the rand in each scenario.<\/p>\n\n\n\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2023\/06\/Rand-projections-Q2-2023.jpg\")
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