Sunday, 30 August 2015

South African Rand - Trends and Forecasts

South African Rand

According to Rand forecasts on the Trading Economics website, the Rand should strengthen to R10 to the dollar in 2020 and R8.51 in 2030.

Conversely, economist Cees Bruggemans predicts R22.50 by 2018.

R22.50 to the dollar by 2018?

The Trading Economics website forecasts are based on the following:

South African Rand Forecasts are projected using an autoregressive integrated moving average (ARIMA) model calibrated using our analysts expectations. We model the past behaviour of South African Rand using vast amounts of historical data and we adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations.

However, looking at the 1 year, 5 year and 10 year history of the Rand shows a near 45 degree angle whereby the rand has gradually deteriorated.

Since 2010; the Rand has lost almost 100% of its value against the US Dollar and UK Pound Sterling. This means that the Rand has lost approximately half its value in 5 years.

Furthermore, the accelerated devaluation of the Rand began during the prolonged trade-union strikes in the mining sector, and subsequent Lonmin Marikana Massacre. This has been exacerbated by an electricity shortage, continued uncertainty of industrial action and proposals for harsher regulations and bigger percentages to be allocated to BEE partners and share-holders.

The above factors are also coinciding with a rising budget deficit. The main risks of a rising deficit is that it increases the chances of a lowering of SA's sovereign credit-rating.

Standard & Poor's credit rating for SA is currently at BBB-.

This is one notch above "junk status" and "non-investment grade".

The budget deficit does not show any near-term probabilities of shrinking; due to rising unemployment, rising population, low tax base of less than 5 million, public sector pay increases, social grants increases and low GDP growth. Five million people are therefore supporting the entire population of approximately 55 million. In the long-term, this is not sustainable if one considers that with low GDP growth of under 2% and rising population and unemployment numbers; the tax base is not growing at a rate which can keep up.

Furthermore, the potential of a $1 Trillion nuclear power-station deal with Russia is increasingly becoming a reality. Such a deal would considerably increase SA's deficit, which in turn could increase the likelihood of a credit downgrade.

On the political side, the influence of the SACP within the ANC and its appointment of members to key positions has increased. The rise of the EFF has arguably also increased their perceived 'need' for anti-white rhetoric as well as the intensification of Black Economic Empowerment (BEE) and 'economic transformation' in order to prevent losing more black voters. Sentiments such as these do not inspire investor confidence and only fuel uncertainty in regards to the economic future of SA.

The Rand is already one of the most volatile currencies in the world, ranging from top 5 to the most volatile. Furthermore, the currency is susceptible to "speculative attacks" via major banks as occurred in 2001; when the currency reached its previous record lows. Political uncertainty, increasingly anti-white and foreign business legislation, electricity shortages and trade-union threats do not help provide stability to an already volatile currency, nor do they contribute positively to overall economic growth.

USD\ZAR Exchange Rate:

1 Year:

South African Rand

5 Years:

South African Rand

10 Years:

South African Rand

40 Years:

South African Rand

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