The rand is headed to a new low against the dollar as it faces a double whammy of a worsening fiscal position and a widening current account deficit, boding ill for importers and threatening to drive up prices at a time when the Reserve Bank’s victory against inflation seemed in sight.
In a note to clients this week, HSBC analysts said that while the Bank has tried to tame inflation and made the rand one of the emerging-market currencies that offer attractive real rates, this has not been enough to shield it from external shocks and internal weaknesses.
“We think global forces and domestic structural drivers are likely to dominate and push the currency to new record lows in the months ahead,” said the report, which was authored by Murat Toprak and Charlotte Ong, who are foreign exchange strategists at HSBC.
Their bleak outlook will complicate matters for the Bank, whose battle to bring down inflation is starting to pay off, with economists forecasting its policy committee will leave rates unchanged on Thursday.
The rand had inched up 0.3% to R18.93/$ by late afternoon on Tuesday. It has weakened more than 11% this year, driven mainly by cyclical factors such as power outages and high inflation.
It is likely to soften to R19.50/$ by year end before losing further ground to R20.50/$ in 2024 as structural factors — the worsening fiscal deficit and widening current account deficit — swap roles with cyclical factors to become the major drivers of the currency in the coming months, HSBC said in the note.
The report comes in the context of the political debate about proposals from the Treasury that provinces and other government entities cut back on spending to make up for an expected revenue shortfall.
Some economists expect the budget shortfall to come in at just over 5%, above the 4% deficit pencilled in by the Treasury in February, weighed down also by mounting spending pressures ahead of the 2024 elections.
Several polls put the ANC’s electoral support below 50% in next year’s general elections, triggering speculation among some analysts and economists that the government could cling to power with economically unsound, populist policies.
The worsening fiscal outlook marks a turnabout of fortunes for finance minister Enoch Godongwana, who inherited a Treasury that enjoyed tens of billions of rand in revenue windfalls when he took over from Tito Mboweni in 2021. He used some of the money to pay for the Covid-19 grant, which is proving politically difficult to scrap.
“The new budget will be tabled on November 1 and should give more clarity on the government’s strategy,” Toprak and Ong said, referring to the medium-term budget policy statement. “However, the fiscal equation is complicated with the elections next year and unions prepared to strike if austerity measures are taken.”
The report said SA’s current account deficit, which measures the gap between what the country earns from exports and pays for imports, is heading towards 2.5% of GDP in 2023, as export growth slows down and import demand picks up.
The balance on the current account swung to a deficit of 0.5% in 2022, making it the first annual shortfall since 2019 — an unwelcome development for central banks as a rising import bill raises the supply of the rand in foreign exchange markets.
External factors
“The gap between exports and imports is unlikely to narrow with weak global demand and relatively weak export commodity prices, combined with likely robust imports, as SA increases its investments in alternative energy sources.”
The global environment is also bleak for the rand, which is increasingly taking its cue from the Chinese renminbi (RMB) as much as it does from the dollar (USD). The US economy is outperforming its peers, suggesting the dollar is likely to get stronger. On the other hand, the renminbi, already one of Asia’s worst-performing currencies, is likely to remain volatile as China grapples with an economic slowdown and structural challenges.
“The global context is all the more challenging since the RMB now plays an important role in the direction of many [emerging-market] currencies,” HSBC said. The sensitivity of emerging-market currencies “to USD-RMB has increased even further over the past month, becoming at times an even more dominant factor than the broad USD”.
motsoenengt@businesslive.co.za
Correction: September 20 2023
An earlier version of this story stated that the rand could weaken to 25.50/$ in 2024. The correct figure is 20.50. Business Day regrets the error
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