w hat ’ s the B u z z ?
How will the Rand shape?
Cees Bruggemans, consulting economist
at Bruggemans & Associates, says that it is
all quiet on the currency front, but that we
are but in a temporary lull, along with other
emerging market peers.
Another period of currency adjustment
is to be expected sometime, such being
apparently the way the world progresses
through major changes.
So more Rand weakness likely ahead.
We are singled out as being more
undervalued than some of our peers, with
the Rand reflecting our fragile balance of
payments deficit, ou r struggling export
competitiveness, our fractious labour
relations, our somewhat over-stretched
government finances, our slow growth,
our sticky budget deficit and still climbing
national debt ratios, and skittish rating
agencies.
So we are effectively on a ledge, on the
brink of being pushed over the edge anew
by events, and potentially seeking even
lower Rand levels.
As things stand, the Rand fully reflects our
current standing in the world, as much
externally as domestically.
What it possibly doesn’t yet fully
reflect is the probable impact of further
global adjustments to come later in the
decade.
The very size of the coming shifts is
intimidating, which opens up a rich array
of possibilities extremely difficult to read
ahead of time.
On the one extreme, the global
adjustment may acquire new shock
aspects as US growth diverges from the
expected trajectory.
On the other extreme, it may all proceed
very benignly, with US growth modest,
resource uptake slow, inflation benign,
and central banks ever so gingerly
feeling their way, with markets buying all
this tenderness.
In between these extremes there remain
many different shades, all potentially
reflected in the Rand, depending on
outcome.
Bruggemans personal preference
remains for a digestible trajectory, with
markets adjusting to rates adjustments,
but recognising the ongoing global
growth and subdued inflation, not
losing confidence, but indeed having it
bolstered.
Yet the journey through 2015-2018 need
not be a repeat of 2013 even if the risk is
ever present.
But only time can tell! The more benign
interpretation gives Rand weakening
at inflation differentials. That means
weakening the Rand at 3% annually.
Shock treatment (market tantrums)
would obvious weaker the Rand much
faster and further, as much as 100 cents
annually through 2020.
Really severe shock treatment could be
even more Rand devastating, with annual
band weakening at times of as much as
200-300 cents.
We are already undervalued in real terms,
reflecting just the way markets read us
and events.
Only exceptional new shock events
may shock us much more heavily in real
terms.
For now that remains speculation, not a
given.