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25 Feb 2018

Rand outlook: the probability to the downside has reduced materially

Annabel Bishop

Chief Economist

and the outlook for the expected case has strengthened towards 50%

Figure 1: Volatile history of the domestic currency

While the rand has recouped its losses from the effects of Nenegate end 2015/early 2016, it has yet to fully recoup the losses of the past near decade (see green channel in figure 1). Financial crises come and go, with the rand tending to revert to prior levels once the crises have passed - see figures 1, 3 and 4 where the rand spikes in 2008, and in 2001, then returns to pre-crisis levels (there was an almost five year lead up on the decline from the Asian financial crises in the late nineties to the eventual fallout for the rand in 2001). The most recent lengthy crisis of investor confidence for South Africa stretched from 2009 to recently, and is displayed by the depressed levels of business sentiment, which averaged a suppressed 41%, as about 60% of business in South Africa were dissatisfied with business conditions. The deterioration of key institutional strengths during the period caused a weakening channel for the rand (see green channel in figure 1), which was broken to the top by an acceleration in rand depreciation in the lead up to Nenegate (and Nenegate itself), before the domestic currency resumed the general (green) channel of decline (figure 1). This uni-direction in the rand has recently been convincingly broken, with the new leadership of SA expected to deliver free market reforms and a supportive environment for the private corporate sector, resulting in a recovery in economic growth from the doldrums it has sunk to (barring any short-term drought-recovery-led bounce). Substantial foreign portfolio inflows, with net purchases of R47bn worth of equities to date, underpins this trend (see figure 3).

Figure 2: Exchange rate forecasts – averages for the expected case
Figure 3: Volatile history of the domestic currency

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