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Long Term Pain Ahead for the Rand

Long Term Pain Ahead for the Rand image

Long Term Pain Ahead for the Rand

26th October 2017

SA’s Medium Term Budget points to Long Term Pain

 

Finance Minister Malusi Gigaba delivered a bleak picture in his medium-term budget policy statement on Wednesday. There were few surprises, though the rand immediately weakened when it became apparent that the minister also had few concrete solutions.

 

Key points:

  • Revenue R50.8 bn below forecasts.

  • Budget deficit up to 4.3% of GDP, up from 3.1% target.

  • GDP growth forecast for 2017 lowered to 0.7% from 1.3%.

  • Growth expected to recover slowly, reaching 1.9% in 2020.

  • Debt servicing now the biggest item in the budget.

  • Government guarantees for SOEs up to to R445 bn.

  • State to sell part of its stake in Telkom.

  • Government will look at bringing a strategic equity partner to SAA. 

  • Will look at other assets to sell after March.

  • No mention of tax hikes.

 

The speech only confirmed what the market already knew. The currency weakened due to the lack of solutions on the table. However, some market participants had expected tax increases to be announced—these may have led to extended losses for the local currency. 

 

It is widely believed that taking concrete action has been delayed until after the ANC elective conference in December. For market participants the elective conference is by far the biggest factor on the horizon. The economic trajectory is unlikely to be halted while Jacob Zuma is more concerned with consolidating power than fixing the economy.

 

There are four possible outcomes to December’s conference:

  • A victory for Nkosazana Dlamini-Zuma – although this would be negative for the rand in the long term it may bring some stability in the short term

  • A victory for Cyril Ramaphosa – likely positive in the short term, but may lead to further turmoil later

  • A compromise candidate such as Zweli Mkhize is chosen through a process of consultation – the effect on the currency would be increased uncertainty until his objectives are established.

  • Conference postponed – This may be the worst outcome for the rand as it would show the ANC is so divided it has become dysfunctional.

 

Further credit rating downgrades are also possible, though a lot of the bad news was already factored into the previous downgrades. The downgrades happened because the rating agencies were expecting what we are now seeing.

 

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GBPZAR weekly chart

 

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USDZAR weekly chart

 

The rand has broken its two-year trend against both the pound and the dollar. Both the dollar and pound have themselves been under pressure throughout 2017, and are now consolidating. However, in both cases the rand is likely to be the driver of any strength or weakness in the next six months.

 

So, the rand has begun a new trend pointing toward further weakness, while the economic trajectory also remains weak. It is possible the rand is oversold and pricing in too much bad news, but buying rands amounts to betting against the trend, and betting on the economy turning around.

 

The currency is also at risk of attack from speculators, though speculators often get burnt betting against the rand. If there are large short positions in the currency, any potentially positive news will be met with sharp rallies.

 

The only thing we can really predict right now is increasing volatility for the rand over the next six weeks.

 

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