31 May, 2013 10:42

The Rand

Have you heard? Jacob Zuma is to become a volunteer firefighter. But instead of a fire engine with a big water reservoir, he is going to drive around in a petrol tanker, using Unleaded 95 to try to douse the flames…. The extent to which the rand’s leap yesterday above (below?) that critical level of 10 to the dollar was caused by Zuma is debatable, but there are a number of factors driving down the rand. So ZA Confidential called on our Panel of Experts to assess the chances of an even weaker rand, and whether this would be such a bad thing…..?

Expert views:

John Cairns at RMB:

The rand is now almost certainly undervalued. History shows that things can still get a lot worse. Remember USD/ZAR got to 13.88 in 2001 and 11.84 in 2008. The extent of this weakness and, more particularly, the speed of the adjustment are still nothing like that seen in 1998, 2001 or 2008. When the rand runs, its moves become erratic, extremely volatile and impossible to predict. To some extent, how far we run is completely random. The market has learnt that the rand always recovers strongly from blowouts. Rational investors use rand weakness as an opportunity to buy, which in turn limits the extent of the fall. Consider that the 2008 move was far less extreme than that of 2001, even though fundamentals were a lot worse. The underlying cyclical backdrop for the rand is terrible. At a time when South Africa is running a massive current account deficit, any upset to financial inflows would have major repercussions. A slowdown would hurt; a complete stop would be disastrous; a reversal would be catastrophic.

Mike Schussler from economists.co.za:

Oh yes, it can get weaker. But I think in the short term (the next month or two) a pull-back is on the cards. World growth is not expected to increase enough (particularly in China) to help commodity prices and therefore commodity exporters are seen as having weaker growth and bigger current account deficits, as commodity prices have all declined by around 10% or more in the last two months. The markets are now also scared that QE 3 is going to end, and hence a "flight to quality" again. Having said that, I think the weaker rand will help exports – at least in the medium term of, say, the next 18 months or so.

Mario Pretorius from Telemasters:

Landing in London with impeccable timing as a reluctant tourist, even the border- control person sneered at my currency. If my currency is the barometer of international sentiment towards ZA’s future, then the world is catching up with local expectations and reality. How many Gupta, Marikana, Nkandla scandals will there be before we face up to the very un-PC reality that the Lady is not Chaste? That the ZA cadre-infiltration has now sapped even SARS’ abilities? That there is no, absolutely NO, prospect of turning around the state socialisation of every resource, every asset and every job as if it is Moscow in 1917? I pity every liberal that peddles blind hope and faith – as if we will wake up tomorrow in a liberal’s paradise from our quicksand revolutionary hell. So ZA is leading the pack in the race to the bottom, where weak currencies will triumph as their exports will soar? Dream on Messrs Gordhan and Manuel. If this is the outcome of the National Planning Commission and its implementation, we will need Gideon Gono here to QE us. What shall we export more of in the downward commodity cycle? Platinum? Ostrich? Exactly.

Craig Pheiffer from Absa Investments:

With the negative sentiment prevailing and wage strikes ongoing, the rand could well get weaker, particularly if we see further US and local bond weakness on top of that (we had big bond outflows on Wednesday). Successfully and peacefully concluded wage negotiations – when and if they come – could well see the rand rally from the weaker levels, though. The big issues remain government’s limited ability to improve the social welfare of the state with an already large budget deficit. On top of the that is the widening current account deficit and those are the issues that the ratings agencies focus on – along with the negative effects of the strike actions (which really just impoverishes more of the populace the longer they are drawn out). The theory is that a weak rand makes our exports more competitive and that’s a good thing that should help reduce the current account deficit. But "compulsory" imports such as oil and capital equipment carry a heftier price tag in rand, and that hurts the deficit. Broader than that, though, a weaker rand is inflationary and that impacts household consumption directly (food and fuel are more expensive for example) and indirectly (potentially through higher interest rates – which also hurts investment). So it doesn’t necessarily follow that a weak rand is the panacea that’s going to reduce the deficit and lift domestic growth prospects.

Russell Lamberti from ETM:

Like a neglected house that looks structurally sturdy until one day it crumbles into a heap, so has been the rand’s slump. The seeds of this crash started being sown in 2010 already, but no house crumbles overnight. The beauty of a (roughly) free-floating currency is that it exposes macroeconomic mismanagement with consummate ease; South Africa has plenty of macroeconomic mismanagement to go around. In the past, when the rand has depreciated so sharply, the Reserve Bank has favoured hiking rates, but the class of 2013 has a low interest rate paradigm, and so interest rate protection for the rand may not be forthcoming in the weeks and months ahead. This does raise the prospect of continued depreciation, even if the currency is becoming cyclically undervalued. When the rand gets into these moods, prediction becomes something of a fools game – but if the past is anything to go by, we may have to brace ourselves for R10.50 or even R11.00 per dollar. Does a weak/weaker rand benefit SA? Not in the least. Some pockets of the economy will undoubtedly benefit, but these benefits are on the whole greatly offset by inflation pressures, rising wage demands, soaring fuel prices, and financial panic. It is no surprise that after two years of steady rand depreciation GDP growth has now slumped to below 1%. If it weakens further, recession beckons.

Chris Hart from Investment Solutions:

The rand remains highly vulnerable to further weakness because:

1) There is a huge external deficit

2) Foreigners have big holdings in both the bond and stock markets

3) Investor sentiment is therefore a bigger factor than normal

4) Investor sentiment is being hammered by strikes, policy uncertainty, slowing growth, and the increasing risk of a credit rating downgrade

The rand could weaken by a further rand or two against the dollar – i.e. to 12 or so – in the short term. At that point, SA assets will look cheap again and capital flows should stabilise and the rand start to recover. Externally, the picture is also bleak. Zero yield, recession, sovereign solvency challenges, so South Africa is in a better position. I would think that by year-end the rand would be recovering back below the 10 level again, based on further deterioration in Europe, and consequent inward capital flows.

Conclusion

There is a lot of uncertainty and whatever else, the floppy rand is now a major talking point…..

Tweet of the Day

Viktor Winetrout, Jr (@Cpin42: The Bible says homosexuality is wrong. I forget the chapter. It’s somewhere between the talking snake and the virgin birth

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