The rand’s recent weakness in the face of an international energy crunch and prospects for tighter policy globally has not been enough to deter BNP Paribas’ short-term bullish bet on the currency, though the French bank expects the factors driving that strength to wane into 2022.
SA’s currency will probably strengthen as much as 4% from last week’s level to about R14.25/$ by year end, supported by the country’s healthy current account, Jeff Schultz, senior economist at the French bank’s local branch, wrote in a research note late last week.
BNP’s short- to medium-term valuation model shows the fair value of the rand at about 14/$, which underlies the company’s bullish forecast of R14.25/$ for year end.
SA’s positive terms of trade, driven by a boom in commodity exports and a slump in imports because of Covid-19, will support the current account, the broadest measure of trade in goods and services, through the second half of 2021, Schultz wrote. It is likely to average a surplus of 3.8% of GDP in 2021, the most since the late 1980s, he wrote.
BNP’s forecast comes amid renewed volatility for the currency, which breached R15/$ for the first time in more than a month a fortnight ago.
Often a proxy of sentiment towards emerging markets, the currency has been dragged down by concerns over an acceleration in inflation globally that may cause developed-economy central banks to lessen stimulus, reducing demand for higher-yielding assets such as SA bonds. Markets have also been spooked by a global energy crunch, which has seen prices surge from China to Europe.
These are headwinds for SA’s growth prospects but are still “not enough to derail our constructive outlook” even as the country’s terms of trade appear to have peaked, said Schultz.
The terms of trade are calculated as the value of exports as a percentage of the value of imports, according to Trading Economics. An increase in the terms of trade means that the value of exports is increasing relative to the value of imports, thus the country can afford to buy more imports with the revenue from its exports.
With global risks continuing to threaten the economic recovery momentum, the country’s good terms of trade might not last and a return to twin deficits — with the government’s budget shortfall still well above pre-Covid levels while global central banks are reducing stimulus — “could present some challenges” for the rand. That will strengthen the argument for higher interest rates, and BNP expects the Reserve Bank to hike the repo rate by 25 basis points in November, and a total of 100 basis points in 2022.
“The normalisation of the current account should start undermining the currency,” Schultz said, “hence, we see a gradual depreciation in the rand in 2022.”
The rand ended last week at R14.9230/$ and has now lost about 5% in the past month.
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