Deutsche Securities, a subsidiary of Deutsche Bank, has revised its rand forecast, as local economists now reckon that US interest rates will only rise in the second quarter next year, six months later than their previous forecast.
This, in turn, is consistent with the euro being stronger against the US dollar, which implies a stronger rand against the US dollar.
The new year-end 2003 forecast is R8,75/$ from R9,50 previously, while the 2003 average is now R8,27 from R8,77. The 2004 forecast is also stronger at a year-end rate of R9,50 from R10,50 with the 2004 average at R9,10 from R9,87.
Apart from the two factors mentioned above, top-rated domestic economists, Chantal Valentine and Gordon Smith, say there have been three further factors that have led to their revisions.
The first is that the carry trade may have been more significant than originally envisaged. The second is that the tourism receipts as a result of South Africa hosting the eighth Cricket World Cup may have resulted in a current account surplus in the first quarter. The third is that the South African Reserve Bank’s (SARB) Net Open Forward Position (NOFP) was eliminated six months earlier than previously expected.
However, the economists warn that if there was some unpredictable event — such as last July’s leak of the mining charter — then there could be a fairly fast retracement.
This was because the rand remained inherently more volatile since the financial rand, which protected the financial account, and the commercial rand, which reflected current account transactions, were unified in March 1995.
“South Africa retains the perennial problem, in the context of still trying to fully liberalise the financial account, of a lack of sustainable long-term capital inflows. The consequent reliance on portfolio flows to fund the current account is, we believe, a key determinant of the currency’s volatility,” the economists wrote.
In the longer term, the economists believe that the exchange control relaxation measures announced in the 2003 budget mean that the diversification of South African residents’ assets to offshore markets is nearing its conclusion.
From 2006 onwards the economists expect the rand to move much more in line with that implied by purchasing power parity, rather than show the real depreciation that has been a feature since 1996, when exchange control relaxation for residents began. – I-Net Bridge