Tumbling rand has a lot to do with SA’s ‘weak growth story’

The considerable weakening of the rand against the dollar since mid-December is 20% attributable to a stronger dollar and 80% due to domestic factors, such as South Africa’s lacklustre growth, says Stanlib chief economist Kevin Lings.

The rand has fallen sharply against the greenback over the past three weeks. At around 7pm on Thursday it was trading at R18.92 – more than 6% weaker against the dollar compared to a month ago.

Although some of the rand weakness is attributable to dollar strength, that is not the only explanation, says Lings.

The rand is fundamentally weak – not just weak against the dollar. The steep decline in the rand reflects a pronounced weakness that requires a more specific explanation, and several factors are at play, Ling notes.

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Dollar strength

“One can say 20% of the movement [in the rand] relates to the interest rate decision by the US Federal Reserve in December. The general expectation is that the Fed is unlikely to cut as aggressively as previously envisaged. And if you don’t cut rates as much it tends to support your currency. In this instance, it is supporting the dollar.”

At its December meeting, the Fed cut interest rates by 25 basis points, and expectations are that a rate cut in January is unlikely.

Annabel Bishop, chief economist at Investec, notes that financial markets expect one cut in the US interest rate cycle – in June – as opposed to previous expectations of a rate cut this month, another in June, and a third in October.

Bloomberg reported on Thursday that US President-elect Donald Trump’s utterances about declaring a national economic emergency reinforced the dollar’s strength.

Lings acknowledges that there is an “element” of a Trump victory present, but says he is loathe to call it a “Trump effect”.

“Trump is all over the place with policy utterances – some of those would be supportive of the dollar and some wouldn’t be.”

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Homegrown factors

Lings is of the view that 80% of the rand’s current movement is more SA-specific.

“Firstly, the mix of trade in our economy is very commodity focused.”

China’s difficulty in effectively restimulating growth means its economy will most likely continue to decelerate. The country will be less focused on fixed investment activity with a lower demand for commodities. “That has a negative effect for South Africa,” says Lings.

Another domestic factor is that South Africa does not have a “growth story”.

“We switched the lights back on, but it has had little effect on the growth dynamic.

“Manufacturing production is down year-on-year, even though there was almost no load shedding,” says Lings.

Added to the mix is the “perpetual outflow” of money from South Africa. “For the last 19 months in a row, foreigners have been net sellers of SA equities in dollars. I would argue that reflects our lack of a growth dynamic.”

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Looking ahead

Lings puts the fair value of the rand at around R17.80 to R17.90 against the dollar.

“The currency is now below fair value – you could say somewhat undervalued, but I won’t say it’s an extremely weak currency under current circumstances.

“The rand remains very prone to volatility and constantly vulnerable to outsized movements. It is very seldom at fair value or stronger than fair value. It only happens about 15% of the time.”

Lings foresees the currency remaining under pressure and weaker than fair value.

“For the rand to strengthen to around R16 against the dollar and become significantly overvalued, South Africa will have to show it has turned policy around and has demonstrable fixed investment,” Lings adds.

“Where we can say to foreigners ‘Look what is happening’ – and then they [can] buy into that.”

This article was republished from Moneyweb. Read the original here.