South African Rand to Recover in Second Half of 2019: Standard Bank

Standard Bank ZAR forecast

 Image © Pound Sterling Live

- Short-term risks could weigh on Rand

- In 2nd half 2019 more support seen

- Rand to rise by December says local lender

The South African Rand, which is considered undervalued by some experts, is expected to see a rebound in the second half of 2019 according to South African lender Standard Bank.

Receding domestic economic risks and fading U.S. Dollar - to which it is inversely correlated - are seen buoying the local unit.

With an exchange rate of 19.13 to a Pound and 14.45 to the Dollar, the Rand is trading below all its major daily and weekly moving averages (MA), and is considered relatively cheap when compared to fundamentals, says Shireen Darmalingam, an economist at Standard Bank, who expects the USD/ZAR rate, at least, to firm to 13.40 by December.

“We expect the Rand to be buoyed by much-needed policy reforms after the elections in May, firming in H2:19,” says Darmalingam.

Another factor supporting the Rand into year end could be a weaker Dollar which would make commodities - many of which are denominated in Dollars effectively more expensive, and exporters of those commodities, such as South Africa, better off.

“While Dollar weakness would not necessarily imply substantial Rand strength on a trade-weighted basis, a weaker Dollar would most likely imply higher commodity prices in Dollar terms - which would then support commodity currencies such as the Rand,” says the economist.

The Rand forecast for H2 2019 comes amidst weaker-than-expected domestic economic data of late.

Business confidence in Q1 fell from 31 to 28 when it was released on Wednesday, March 13, and mining and manufacturing production in December also showed declines when they were released on Thursday.

In January, mining output growth declined by 3.3% y/y, from a revised decline of 4.1% y/y in December (previously -4.8% y/y).

"This spells weaker growth in H1:19 amid policy and political uncertainty, and also ahead of the SA general elections. The mining sector looks bleak medium-term,” says Darmalingam.

Manufacturing production growth for January too has disappointed, at 0.3% y/y (0% y/y in December).

"We see modest growth this year, with the risks to the downside,” says Darmalingam.

A cocktail of elevated electricity costs combined with greater disruptions to the power supply is a headwind for the economy, and the financial situation at Eskom remains a risk factor for future economic growth expectations.

Yet not all recent data has been bad, and the Rand was buoyed earlier in the month when Q4 GDP showed a 1.4% rise compared to the 1.2% analysts had forecast - although it was still markedly lower than the 2.6% annualised rate of Q3.

In H1 the Rand could trade choppily, despite the brighter forecast for the second half of the year. Credit rating agency Moody’s rating review on March 29, and the general elections on May 8 are two potentially volatile dates for the currency on the short-to-medium term.

South Africa continues to hang onto its Baa3 investment grade credit rating by a single notch. If it were to be downgraded by Moody’s in March, however, it would lose investment grade and fall into ‘junk’ status. In such a situation many investors would have to sell their holdings of SA debt and this would be a disaster for the currency.

Election risks are relatively low because the most likely scenario by far is the re-election of the dominant ANC government led by Cyril Ramaphosa. At the last elections the ANC won easily the vast majority of seats.

The only credible opposition is the Democratic Alliance (DA) but despite changes to its leadership to make it appeal more to middle class black voters who tend to support ANC now, it is unlikely to make up the substantial gap that still lies between it and the ANC.

The EFF (Economic Freedom Fighters) is however a party to watch, as their populist agenda tends to strike a chord with the South Africa's least well-off. A strong showing by the EFF could well place pressure on the ANC to pivot towards more populist policies which would typically be expected to weigh on economic sentiment.

At the last parliamentary elections in 2014, of the 400 seats in parliament, the ANC won 249; the DA won 89; the EFF won 25. Six other parties also altogether hold the remaining seats.

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