The rand is forecast to depreciate gradually over the next two years, reaching a median of R8,967 per dollar at the end of March 2004 and 9,478 at the end of March 2005, the March 2003 survey of economists by London-based Consensus Economics shows.
Every month Consensus Economics surveys over 250 economists in several countries around the world for their view on over 90 currencies over a two-year time horizon.
The most optimistic forecaster in the March 2003 survey over the next year was Merrill Lynch, which forecast a R7,70 per dollar level at the end of March 2004, while the most pessimistic was Credit Agricole Indosuez, who are forecasting a R10,95 per dollar exchange rate.
The most optimistic forecaster for March 2005 was Royal Bank of Canada, which forecast R8 per dollar, while the most pessimistic remained Credit Agricole Indosuez, who are forecasting a R11,40 per dollar exchange rate.
Other organisations such as credit rating agency Standard & Poor’s endorse the relatively benign outlook for the rand. The rand should be less volatile this year, international credit ratings agency Standard & Poor’s (S&P) managing director for Europe, Middle East and Africa sovereign ratings, Konrad Reuss, said late in January.
“In 2001 the rand was the worst performing currency amongst emerging markets, only to become the best performing currency last year. This highlights the rand’s tendency to overshoot on both the downside and upside. This year we expect the rand to be less volatile,” Reuss said.
A look at the rand per US dollar exchange chart shows that the rand tends to be remarkably stable after bouts of high volatility. This was the case in 1987 after the 1984/6 period of rand weakness. The rand went from R1,1826 per dollar in March 1984 to 2,8069 in August 1985 after the Rubicon speech. It then recovered to 1,9703 in February 1986 only to weaken again to 2,8119 in June 1986 after a State of Emergency was proclaimed to dampen protests related to the tenth anniversary of the Soweto riots.
In 1987 the range was from 2,2059 in January to 1,9156 in December, while the monthly average varied from 2,1171 in January to 1,9532 in December.
Similar stable years took place in 1990, 1995 and 1999. In 1990 the range was 18,9 SA cents per dollar from 2,67690 in April to 2,4900 in December, while in 1995, the range was 18,05 SA cents per dollar from R3,5200 per dollar in February to 3,7005 in May.
After a volatile January 1999 as a result of the Brazilian devaluation, the rand traded in a 35,75 SA cents range between 5,9335 rand per dollar in February 1999 to 6,2910 in May 1999. On a monthly average basis the range over the same period was only 14,8 SA cents per dollar from 6.2021 in March 1999 to 6,0541 in September 1999.
The 1999 episode is especially relevant as many arguments for both rand strength and rand weakness apply to the current situation. The rand bulls argue that recovering commodity prices boost commodity-based currencies such as the Australian dollar (Aussie) and the rand. The Australian dollar has recovered from a worst level of 48,61 US cents per Aussie in September 2001 to a best level of 61,69 US cents per Aussie on March 5. Many analysts are forecasting a return to the 1999 annual average of 65 US cents per Aussie by the end of this year.
Similarly, the rand has already recovered from a worst level of R13,86 per dollar in December 2001 to a best level of 7,8357 on March 5 this year. The rand bears argue that interest rate cuts this year will rob the rand of its attraction for the carry trade and the rand will therefore weaken.
In 1999 commodity prices did recover, but although the current account improved by 1,2% points from a deficit to GDP ratio of 1,7% in 1998 to 0,5% in 1999, the rand did not react and stayed stable.
In a similar manner, although South Africa cut its prime rate eight times in 1999 from 23% in January 1999 to 15,5% in October 1999, the rand did not react and stayed stable.
An I-Net Bridge survey done in December last year resulted in a range for
the year-end forecast for 2003 from R9 per dollar to R11 per dollar with a median of 10.60, while for 2004 it is 10 to 12,50 with a median of 11.50.
Economists warn that forecasting any currency is the most difficult variable to forecast as volatile capital flows overwhelm foreign trade flows. Consensus Economics also asked economists to give a probability distribution of the chances of a more than 20% appreciation against the US dollar. The rand was given the highest probability out of all currencies surveyed at 8,8%.
The rand has so far traded in a range of R9,0773 per dollar to 7,8357 this year with an average of 8,32 compared with an average last year of 10,51 and the annual average of 8,61 in 2001. – I-Net-Bridge