Deutsche Bank Defies Rand Bears as South Africa Turns Corner

  • Lender sees currency extending gains in 2017 as growth revives
  • Relatively high real rates shield rand against Fed tightening

After posting one of the strongest rallies in emerging markets this year, South Africa’s rand is headed for a 12 percent drop in 2017, according to analysts polled by Bloomberg. Deutsche Bank AG says they’ve got it wrong.

The fourth-biggest foreign-exchange trader is shrugging off political uncertainty that’s slowed the currency’s advance in 2016, predicting a gain of about 7 percent to 12.50 per dollar next year. Here’s why:

Inflation Outlook

Inflation is slowing. The South African Reserve Bank sees the rise in consumer prices averaging 5.8 percent in 2017, down from a seven year high of 7 percent in February. That means the yield on South African assets will remain attractive, even as U.S. interest rates rise, Deutsche Bank economist Danelee Masia said in a report Dec. 5.

Economy Rebounding

South Africa’s economy barely avoided a recession in 2016, but things are looking up. Growth should accelerate to 1.4 percent in 2017, more than the central bank’s estimate of 1.2 percent, as companies rebuild profit margins through a combination of cost efficiencies, job cuts and wage restraint, according to Deutsche Bank. A rebound in agriculture following the worst drought in more than 100 years may also fuel growth.

Current-Account Gap

The rand’s Achilles’ heel, the current-account deficit, is narrowing as subdued demand constrains imports. While the shortfall widened in the third quarter to 4.1 percent of gross domestic product, from 2.9 percent the previous three months, Deutsche Bank predicts it will decline to the smallest margin in six years in 2017, making the rand less vulnerable to capital outflows as the U.S. lifts interest rates.

The rand declined 0.3 percent on Friday to 13.6951 per dollar. Rand Merchant Bank, the second most-accurate dollar forecaster in the third quarter according to Bloomberg rankings, predicts the currency will strengthen to 13 by the end of 2017. The top rand forecaster, Swissquote Bank SA, sees the currency at 14.70, while third-placed ABN Amro Bank sees a drop to 15.25.

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