The rand could weaken to R21.40 to the US dollar in 2024 and even further to R21.90 by the end of next year according to Investecs worst-case scenario. The rand was already under pressure over the past week due to several factors weighing it down.
According to Annabel Bishop, chief economist at Investec, these factors are a strong US economy, inflation concerns, delayed repo rate cuts and the continuing conflict in the Middle East.
Positive data on US retail sales, housing, industrial production and manufacturing all indicate a resilient US economy, but sticky inflation in the US could make the US Federal Reserve (Fed) wary of cutting rates too soon.
The International Monetary Fund (IMF) also warned about persistently high global inflation in its latest World Economic Outlook, highlighting that its projections for global economic growth in the next five years have steadily declined since the global financial crisis.
Bishop says the IMFs persistent low-growth scenario, combined with high interest rates, could put debt sustainability at risk, restricting governments capacity to counter economic slowdowns and invest in social welfare or environmental initiatives.
High consumer expectations of inflation make central banks task of targeting inflation more difficult, particularly if inflation expectations are rising and are expected to do so over the longer-term.
Fed will only cut rates at the end of the year or not at allBishop says the market now expects the Fed to cut rates only in the fourth quarter of 2024 and it is possible that there will even be no cut this year. The rand historically strengthens during the US rate cut cycles and therefore the delay weakens the rand.
The US dollars strength over the course of last week aided the rand weaker, boosted by the higher than forecast US inflation outcomes. Additionally, the European Central Bank has signalled it may soon cut interest rates, which could add to US dollar strength.
She warns that with other recent inflation measures disappointing on the upside for March, there is a risk that this measure too will prove stickiness, or see some upwards pressure, which will add to expectations on the delay in US rate cuts.
The rand is consequently weak against the US dollar and is also undercut by the uncertainties hanging over the economy with the election six weeks away and no clarity on the nature of the likely coalition government.
She adds that the ongoing conflict in the Middle East also affects the strength of the rand as it could cause an increase in oil prices that will cause inflation to increase as well. This was demonstrated on Friday when the rand spiked to R19.37 against the US dollar due to geopolitical tensions after an Israeli drone strike on Iran.
Political uncertainty also affecting the randThe other main issue affecting the rand is political uncertainty ahead of South Africas national election on 29 May, which is causing investors to be cautious, Bishop says.
Numerous pre-election sentiment polls showing support for the ANC weakening have also negatively affected the domestic currency, with the risk in some recent polls showing a below 40% outcome for the leading political party.
She also points out that worries over the nationalisation policies of the EFF, which the ANC had already gone into coalition with in some metros, has negatively affected investor sentiment, as nationalisation of property is negative for investment and growth.
Investecs base case scenario forecast sees the rand at R18.20 to the US dollar for the second quarter of 2024 and to average R18.17 to the US dollar this year, assuming that South Africas economic growth reaches 2.0% over five years with sufficient domestic policy support measures, although it could be affected by load shedding and logistics issues.
In this scenario, Bishop sees the rand stabilise and strengthen slightly, while weather patterns will affect food prices and therefore inflation. In addition, there is no nationalisation and little expropriation without compensation that has no negative effect on the economy, while the wars in Ukraine and the Middle East tensions persist and do not escalate.
Rand could trade at R16.99 if everything is perfectInvestecs extreme up case scenario sees the rand average R16.99 to the US dollar in 2024 and this scenario assumes that South Africas economic growth increases by 3% to 5% followed by 5% to 7%, while the country is assumed to have good governance and growth-creating reforms with structural constraints eradicated.
In this scenario there is no nationalisation or expropriation without compensation and South Africa only stays on the greylist for 18 months.
On the other hand, according to Investecs severe down case for the rand in 2024 it averages at R20.49 to the US dollar. In this scenario ther
