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One of South Africa's most prominent investment banks sees the Rand turning a corner by the third-quarter of 2020, however they warn of heightened risks that the impact of domestic economic underperformance relative to global peers and the covid-inspired contraction will leave a lasting legacy on the currency.
In an update to clients on the Rand's outlook, Investec says their base-case envisages a temporary sharp global slowdown and global financial turmoil from the covid-19 pandemic that results in "severe currency depreciation" and low interest rates.
"The domestic currency is still at weak levels, and is likely to remain volatile and weak in the near term until evidence for the beginnings of a recovery in the global economy become clearer," says Annabel Bishop, economist at Investec.
Bishop says eventually sufficient global and domestic monetary and other policy measures support growth and markets allowing sentiment to stabilise.
South Africa is forecast to exit recession in the third quarter of 2020, which Investec see as marking a low-point for the South African Rand on global markets.
However, much of the Rand's ability to recover from this point will rely on market unfriendly domestic policies - such as the expropriation of private sector property - being put on hold.
The government's debt projections will also need to stabilise.
Economists at the bank forecast a GDP contraction of around 5.0% year on year for South Africa in 2020. They anticipate the rebound in 2021 at 2.9% year on year, which is slower than the recovery envisioned by the IMF who see a 4% rebound in 2021.
"The domestic outcome will depend on the pace of the further opening up of the local economy, likely a phased approach depending on new Covid-19 cases moderating," says Bishop. "Uncertainty heightens risk aversion in financial markets and the deep recessions forecast around the globe exacerbate risk-off sentiment, and hence rand weakness."
The Pound-to-Rand exchange rate is forecast to return back below 20.00 and trade at 19.99 in the third quarter of 2020 under Investec's base-case scenario, before falling back into the 18s in 2021.
The Euro-to-Rand exchange rate is forecast to trade at 18.19 by September according to Investec while the Dollar-to-Rand exchange rate trades at 17.00, and fades back further over subsequent months.
Investec's base-case scenario has a 43% probability attached to it, while a "severe down case" is attached a 10% probability. Under such a "severe down case" scenario the South African economy enters a recession, triggering "unprecedented Rand weakness".
Nationalisation of private sector property is pushed forward, while the Government is forced to scramble for money from ever more sources as it finds itself sinking into a debt trap.
Under such an outcome the Dollar-Rand exchange rate reaches a high of 24.00 by September.
The Pound-Rand exchange rate is seen trading as high as 28.22 and does not fall back below 20.00 over the course of the next two years.
The Euro-Rand exchange rate is seen trading as high as 25.68 and only falls back below 20.00 in the third quarter of 2021.
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