The rand is undervalued now - and here's where it's headed for the rest of the year: Nedbank - BusinessTech

The rand is undervalued now – and here’s where it’s headed for the rest of the year: Nedbank – BusinessTech

Global financial conditions are likely to become less supportive of the rand despite data showing that the local currency is undervalued, Nedbank economists say.

In a research note published on Friday (May 27), the bank indicated that the US Federal Reserve’s move to increase interest rates at a pace is likely to support the dollar, putting renewed pressure on emerging market currencies such as the rand.

Tightening of global monetary policies, rising food and fuel prices, and war uncertainty are increasing the risks of policy mistakes and a global recession. Recession fears will also tend to boost risk-off sentiment and a stronger dollar, the report said.

The bank said that while the resurgence of commodity prices caused by the war supported the currencies of commodity exporters, the upward trend only continued in coal, oil, natural gas and food prices during the month of May.

Aside from coal, prices for most of South Africa’s largest commodity exports have fallen over the past month. We continue to expect South Africa’s terms of trade to weaken as the year progresses, while disruptions in global trade, slowing global demand and domestic power outages will affect export volumes.”

She added that the country’s trade surplus and current account is expected to shrink and gradually become less supportive of the rand.

In contrast, the Reserve Bank is now expected to tighten monetary policy more aggressively. High domestic interest rates and relatively deep and liquid financial markets should maintain some foreign capital inflows, helping to prevent the dramatic weakening of the rand.

“Despite the supporting factors, non-supportive global conditions are expected This results in a moderate weakening of the rand during the remainder of this year. “

Nedbank forecast shows that the rand It could reach 16.18 rand per dollar in the third quarter of 2022 Before moderation around R16 / dollar level at the end of the year.

Some good news – but investors still take their money

Despite this undervaluation, there was some good news on the country’s financial side, Nedbank said.

“S&P Global left South Africa’s sovereign risk rating unchanged at its lowest investment grade, but raised the rating outlook to positive. The improved outlook reflects progress towards fiscal consolidation over the past year, evidence of spending consolidation and some progress in structural reforms and reduced external weakness the country in the face of global shocks, such as the expected tightening in global financial conditions.”

However, S&P Global stressed that there are upside risks to the financial outlook, including the risk of over-budget increases in the public sector wage bill, a possible extension of the distress social relief grant, and possibly further bailouts of struggling state-owned companies.

The agency also noted that growth prospects remained weak, undermined by the country’s electricity shortage and other structural constraints.

“While the path to financial sustainability is encouraging, it is challenging,” Nedbank said. “It will be necessary to maintain spending control over the next three to five years even as unemployment continues to rise and economic growth falters at a gradual pace.

“Given the many uncertainties associated with the financial outlook, a rating upgrade is unlikely over the next two years.”

However, the bank noted that fiscal policy developments have not hurt the rand over the past year, repeatedly surprising the upside and boosting investor sentiment toward South Africa compared to other emerging markets.

However, it did not stop the gradual but continuous withdrawal of foreigners from the domestic bond market. The Reserve Bank notes in its latest Financial Stability Report that the decline in foreign holdings of domestic bonds has significantly reduced the levels of liquidity in the market.

“The government still needs to demonstrate its ability to put the country’s finances back on a sustainable track and reduce the debt burden to manageable levels. Until then, financial risks will remain elevated, although they are not necessarily a significant driver of the rand’s future trajectory.”

Read: How much money do you need to be middle class in South Africa

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