Top Forecaster Sees Rand Blip Before Slide: South Africa Credit
The South African rand’s rebound this month will persevere through year-end, then reverse with the currency tumbling during most of 2014, according to the most accurate forecaster in the third quarter.
Danske Bank A/S (DANSKE), the best at predicting the rand against the dollar over the past four quarters, according to data compiled by Bloomberg, sees the currency rallying about 3 percent to 9.67 per dollar by Dec. 31 before weakening 6.2 percent over the next three quarters. The rand’s 15 percent slump this year is the worst out of 16 major currencies tracked by Bloomberg.
The recovery will prove short-lived because of the government’s failure to rein in labor unions and policies that stifle economic growth, said Lars Christensen, chief emerging-markets analyst at Danske. That risks weighing on rand bonds, whose 10-year yields have climbed 88 basis points this year, the most after Turkey among emerging-market peers in Europe, the Middle East and Africa, according to Gina Schoeman, an analyst at Citigroup Inc. (C), the second-ranked forecaster.
“I’m really worried about the direction South Africa is taking,” Christensen said by phone from Copenhagen on Oct. 4. “Some of the policy directions taken by the government are not consistent with market reforms and free markets. The cost of that is going to be fairly high.”
Citigroup sees the rand gaining to 9.80 per dollar by year-end before declining to 10.20 in 2014, while Warsaw-based X-Trade Brokers Dom Maklerski SA, the third-most accurate, sees a drop to 10.12 by the end of the second quarter of next year. The currency will probably appreciate about 2 percent to 9.80 per dollar by the end of 2014, according to the median forecast of 30 analysts surveyed by Bloomberg.
The rand fell 0.1 percent to 9.9750 per dollar as of 2:45 p.m. in Johannesburg. Yields on benchmark bonds due February 2023 were unchanged at 7.66 percent after falling two basis points, or 0.02 percentage point, yesterday.
South African President Jacob Zuma is reviewing mining royalties as he comes under pressure to alleviate poverty and inequality in the world’s biggest producer of platinum and chrome. With elections due to take place next year, the ruling African National Congress is seeking to cut a 25 percent unemployment rate and reduce income disparities that are among the highest in the world.
At the same time, a series of strikes in industries ranging from mining to carmakers has undermined investor confidence. Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, said it will halt future expansion plans after a three-week strike that cost the industry as much as 700 million rand ($70 million) a day, according to the Automobile Manufacturers Employers Association.
“South Africa is becoming less globally competitive in terms of wages, energy cost, water cost,” BMW spokesman Guy Kilfoil said in an interview on Oct. 3. “All of those things are making South Africa a less attractive destination for foreign investment.”
South Africa relies on foreign investment to plug the gap in the current account, funds which may dry up as the Federal Reserve starts tapering monthly bond purchases. That leaves the nation vulnerable to external shocks, according to the International Monetary Fund, which said on Oct. 8 that South Africa needs “structural reforms” to improve government services, ease infrastructure bottlenecks and increase labor market flexibility.
The current-account deficit widened to 6.5 percent of gross domestic product in the second quarter from 5.8 percent in the previous three months. It will probably remain under pressure after the trade gap grew to 19.1 billion rand in August, the biggest since January. The budget shortfall reached 5.1 percent of GDP in the year through March, according to National Treasury estimates.
Moody’s Investors Service and Standard & Poor’s retained a negative outlook for the nation’s debt after downgrades last year, citing concern that spending will increase before next year’s vote.
“Political noise is rising before the elections, labor issues remain complicated, and all of that adds to” the rand’s risk premium, Citigroup’s Schoeman said by phone from Johannesburg yesterday. “If we face another credit-rating downgrade, as I believe we do, we will see that reflected in bond yields, and we will see that reflected in the currency.”
The rand’s decline in the past three years may have been enough to start boosting exports as the global economy recovers, according to analysts including David Bloom, head of currency strategy at HSBC Holdings Plc (HSBA), Europe’s biggest bank. HSBC sees the South African currency ending the year at 9.80 per dollar and extending its recovery to 9.20 by the end of 2014.
Foreign investors bought a net 66.5 billion rand of South African bonds and stocks this year, compared with inflows of 75.9 billion rand in the same period in 2012, according to JSE Ltd., which runs the nation’s stock and bond exchanges.
The cost to insure South African debt against non-payment using five-year credit default swaps climbed 46 basis points this year to 188 yesterday. The extra yield investors demand to hold the nation’s dollar bonds rather than U.S. Treasuries surged 101 basis points in the period, according to JPMorgan Chase & Co. EMBI indexes.
“It is true that the weak rand is making our exports more competitive, but we can’t get those exports out of the ground,” Schoeman said, referring to mining strikes that contributed to an 8.6 percent decline in production this year. “Even if the current account gets a bit better, it will disappoint expectations.”
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