RenCap Sees South African Rand Gaining 30% on Inflows

  • Currency could strengthen as much as 30 percent: RenCap
  • RenCap’s view at odds with most peers who predict drop

South Africa’s rand is set to extend gains, strengthening between 20 percent and 30 percent against the dollar over the next two years as relatively high yields continue to attract investment into Africa’s biggest economy, according to Renaissance Capital Ltd.

An improvement in the current-account deficit, a risk factor for the currency, also bodes well for the rand, Charles Robertson, the London-based chief economist at RenCap, said at a conference Monday in the Kenyan capital, Nairobi. South Africa’s currency is the most undervalued among emerging-market peers after Mexico’s peso and Venezuela’s bolivar, he said.

Robertson’s view is at odds with some analysts including Peter Attard Montalto of Nomura International Plc, who predicts the rand will weaken as much as 30 percent to 18 per dollar over the next year. The median forecast in a Bloomberg survey is for the rand to trade at 14.50 in two years’ time, a depreciation of 6 percent, as the fall in commodity prices, political uncertainty and the risk of a credit downgrade weigh on the currency.

The rand gained 6.8 percent in the third quarter, the most among more than 150 global currencies tracked by Bloomberg, as foreign investors bought a net 21.3 billion rand ($1.6 billion) of South African bonds. Anheuser-Busch InBev SA’s $104 billion purchase of SABMiller Plc, a transaction that could result in 100 billion rand of inflows to South African shareholders of the beer maker, may also buoy the rand, Robertson said.

“It was so undervalued, and there has been an improvement in the current-account deficit,” Robertson said. “We also expect foreign direct investment coming into South Africa. You can see this from the SABMiller/AB Inbev deal. It is done in shares rather than in a new factory, which again is saying South Africa is a cheap place, pick up those assets.”

Foreign Investment

South Africa’s current-account shortfall narrowed to 3.1 percent of gross domestic product in the second quarter, from 5.3 percent the quarter before, as the nation’s exports received a boost from the lagged effect of last year’s rand weakness. Africa’s most-industrialized economy relies mainly on foreign investment in stocks and bonds to help fund the deficit, making the rand vulnerable to a sell-off in emerging-market assets or domestic risks.

The currency slumped 6 percent in August amid concern Finance Minister Pravin Gordhan would lose his job as a struggle over the government’s purse strings intensified. The country is at risk of losing its investment-level credit status as S&P Global Ratings Ltd. and Fitch Ratings Ltd. review their assessments in December.

The rand gained 1 percent to 13.5914 per dollar by 1:27 p.m. in Johannesburg. It may reach 11 rand per dollar, its fair value, by 2018 as the strengthening momentum continues, Robertson said.

“Momentum has been with the rand,” he said. “If you see a currency gain every day for 300 days, you will buy it again, because it is momentum and momentum works until something big changes.”

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