As we start the New Year, political and economic uncertainties continue to affect local and international investors’ decisions. The local currency in particular went through a bit of a rollercoaster in 2018. STANLIB Chief Economist Kevin Lings brings some clarity on the volatile currency and shares his expectations for the currency in 2019.
The South African Rand took a significant knock in 2018
In 2018, the Rand weakened 13.9% against the US Dollar, after strengthening by 10.5% in 2017 and going up 13.2% in 2016. On a trade-weighted basis, the Rand weakened by 10.9% in 2018, suggesting that the Rand’s decline in 2018 was not simply due to Dollar strength.
According to Lings, a variety of factors contributed to the depreciation of the Rand in 2018, including the weakness of the domestic economy but also an increase in global risk aversion brought about by a tightening of global financial market conditions.
South Africa, Brazil, Russia, and Turkey are currently regarded as more vulnerable emerging market currencies. This vulnerability is not necessarily structural in nature and can be reduced by a systematic improvement in South Africa’s economic fundamentals, including policy formulation, economic growth, employment and the emergence of viable investment opportunities.
What you can expect from the local currency in 2019
Lings says, “At R14 to the Dollar, the Rand is roughly 5% to 10% undervalued. It’s likely to remain undervalued in 2019 as the country continues to struggle to meaningfully change its growth, investment and employment trajectory.”
Despite the fact that the currency is already fundamentally undervalued, you can expect the Rand to remain under pressure, weakening further to around R14.75 by the end of 2019. This expectation is partly due to a likely further tightening of global liquidity conditions.
Lings flags six factors that will dampen the Rand’s performance in 2019
- A further reduction in the US Federal Reserve’s balance sheet
- Slightly higher interest rates in the developed economies
- Relatively sluggish economic growth in South Africa
- Ongoing concerns about the country’s credit rating
- The national election
- A lack of progress in job creation
“Unfortunately, we also expect the recent volatility to continue throughout 2019 as global investors continue to adjust to the slow normalisation of monetary policy in the developed world,” says Lings.
Under these circumstances, it’s critical that South Africa changes current investor perception that the country is “one of the more vulnerable emerging markets”. Instead, South Africa must enforce the idea that it’s “an emerging economy looking to increase investment in order to lift economic growth and development”.
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