Rand depreciation to persist

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A CURRENCY risk, which increased notably over the past year in Sub-Saharan Africa (SSA), is seen remaining elevated over the next 18 months with the South African rand expected to depreciate further, according to research by Oxford University’s NKC African Economics (NKC).

Taurai Mangudhla

In a regional SSA short-term exchange rate outlook published last month, NKC said the fragile South African rand would primarily be a barometer of regional market perceptions with regard to US debt curve repricing and China-related growth concerns.

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“We expect the rand to depreciate from an average of R13,87/US dollar in 2015 Q4 to R14,22/US$ in 2016 Q1,” reads part of the report.

“We ascribe a 60% probability to US monetary policy tightening by December. Under this assumption, we anticipate the rand to trend somewhat firmer in successive quarters, averaging R14,09/US$ in Q2, R13,99/US$ in Q3 and R13,89/US$ in Q4. Risks are however tilted to the downside – i.e. rand weakness,” added NKC.

This comes as Finance minister Patrick Chinamasa last week announced in his 2016 national budget statement that the South African rand lost over 13% of its value against the US dollar since January 2015, a development which has also seen Zimbabweans increasingly preferring the US dollar over the rand in conducting business transactions and as a store of value.

Chinamasa said demand for bond coins has also been rising, following the continued depreciation of the South African rand, whose coins had dominated lower end transactions since the adoption of the multiple currency system in 2009.
“In 2015, the general price level in the economy remained low, with year-on-year inflation opening the year at -1,3%, and reaching -3,3% by October 2015. Inflation deceleration, however, also reflects price correction, weak aggregate demand, tight liquidity and depreciation of the rand against the United States dollar,” Chinamasa said in his statement.

“Furthermore, the continued depreciation of the rand against the US dollar, has undermined the competitiveness of our exports.”

A depreciating rand, according to South African-based Zimbabwean financial analyst Colls Ndlovu, can be beneficial to Zimbabwean consumers in the form of cheaper imported goods, given that the country imports most of its products from South Africa, hence signs of deflation within the Zimbabwean economy.

Independent economist Vince Musewe said further depreciation of the South African rand means Zimbabwe’s imports become cheaper given that 70% of the country’s imports come from South Africa.

“In a normal situation, prices of foodstuffs will come down on the consumer side, but in our case these business operators will just get better margins and the rand depreciation will not be passed to the consumer,” Musewe said.

He said more South African investors are expected to come and invest in Zimbabwe if the rand devaluation persists.

“People come here to look for opportunities to earn the United States dollar and then they go and use it in South Africa so it will mean more people from South Africa looking for opportunity in Zimbabwe,” he said.

Musewe, however, said South African companies who buy shares on the Zimbabwe Stock exchange will now find it more expensive.

Zimbabwe Economics Society president Lovemore Kadenge said Zimbabweans will take advantage of the weakening rand to import more from South Africa.

“In the short to medium-term, South Africa will export more of its products,” said Kadenge.

Economist Prosper Chitambara also said devaluation of the rand creates pressure on Zimbabwe’s current account deficit while eroding both domestic and export competitiveness.

The research unit said currencies in the SSA region had a tumultuous ride this year, undermined by a prolonged commodity price slump, and the resultant spillover effects to the balance of payments and fiscal positions, as well as global growth concerns and external monetary policy decisions.

The research unit argued that as a result monetary policy, on aggregate, was expected to be skewed towards aggressive tightening over the next 18 months as price stability will be favoured above short-term growth potential.
NKC said the fragile Zambian kwacha — which has been hit by a severe shock to the terms of trade — is susceptible to rapid depreciation as a loss of confidence incentivises front-loading of dollar purchases.

“The loss of confidence in the kwacha, as well as political uncertainty surrounding the election next year, could see the exchange rate remain weaker than the estimated equilibrium value for an extended period of time,” said NKC.

“It is crucial that confidence be restored in the kwacha in order to limit the spill over effects to the sovereign balance sheet. With the budget speech for 2016 calling for a further increase in commercial external borrowing, Zambia faces a conundrum. We argue that Zambia needs to urgently seek support from the International Monetary Fund (IMF) and/or World Bank to meet borrowing requirements and re-establish investor confidence.”

Another devaluation of the Angolan kwanza before the end of the year to Kz144,5/US$ from the current rate of Kz134,63/US$ is forecasted by NKC.

“Further shocks to the oil price hold a risk that the (Angolan) central bank will introduce more restrictive capital controls,” said the research unit.

NKC said it expects world GDP growth to equate to 2,5% this year before accelerating to 2,7% in 2016, a downward revision from an earlier projection of 2,6% for 2015 and 3% growth next year.

“Slow world trade growth — which incentivises competitive devaluations — as well as deteriorating terms of trade, rising inflation differentials, adverse weather conditions as well as foreign factors pertaining to US yield curve repricing are expected to increasingly weigh on SSA currencies in coming months,” said NKC.

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