Currency speculators were gifted a no-lose trade against the rand once the Hawks announced they wanted to interview finance minister Pravin Gordhan over his alleged wrong-doing while at SA Revenue Services. But it could just as easily reverse direction should the Hawks abandon what looks like a pointless witch-hunt.
If history is any guide, it is unwise to extrapolate trends forever, says Dave Mohr, chief investment strategist at Old Mutual Multi-managers, who sees the first buds of spring after a barren winter for the SA economy.
When the rand first broke R12 against the US dollar in 2002, there was a rush by South Africans to move their savings abroad. Their timing was horrible. What followed was a six year bull cycle in the rand that decimated their off-shore asset values. The same cautionary tale should be heeded by those contemplating a rush for the exit door under the current environment of rand weakness. While international diversification is a sound investment strategy at all times, trying to game the currency market is not.
“Given the relative under-valuation of the rand, we should not be surprised to see further gains over the next few years,” says Mohr.
At the start of 2016, the rand jumped the rails to trade briefly above R17 to the US dollar over the “three finance ministers in a week” tragi-comedy, aggravated by sour news from China over its slowing economy. It recovered to R13.20 in early August before the Hawks, at the apparent bidding of hardline elements in the ANC, demanded to interview Gordhan over his supposed role in setting up a rogue investigation unit at SARS during his tenure from 1999 to 2009. Gordhan refused, saying he had done nothing wrong. This sent the rand-US dollar rate crashing back to R14.50.
Investec warns that if Gordhan-gate escalates much beyond this point, we could be looking at R19 to the US dollar. That would be tantamount to suicide.
Mohr points to several fundamental improvements in the economy, not least of which is the improvement in the balance of payments. “Our oil bill declined by R120 billion over the last 18 months, and our exports improved R42 billion in the first half of this year compared to 2015. This is a net injection into local economy,” he says.
Another positive for SA is the recovery in commodity prices, and positive real interest rates of around 8.5% versus almost nothing in the developed countries. This means we should expect to see a return in the so-called “carry trade” – where investors borrow abroad at cheap rates and invest in SA and other emerging markets at higher interest rates.
Six months ago, Mohr says one of the country’s major risks was electricity outages. “We didn’t know if we had enough electricity to power the forecasted growth. Lower growth has certainly reduced demand, but the threat of blackouts has now receded.”
Another positive for the economy is the normalisation of weather patterns. The drought hammered agriculture last year, ruining farmers’ balance sheets and driving up the cost of food. The expectations are that we will have a better crop this year which, coupled with better crops in countries such as US, Brazil and Russia, points to a reduction in global food prices going forward.
The weak rand has helped lift export volumes, and makes SA an affordable and attractive destination for tourists. A year ago, the JSE’s construction sector was priced for bankruptcy, but has started to recover as work volumes start to pick up.
Another positive is the benign inflationary outlook. Mohr does not see inflation rising much above 6% in the foreseeable future, which should allow the Reserve Bank to keep rate hikes on hold for the time being.
All of this good work – including Gordhan’s firm hand at Treasury and a refusal to entertain the recklessness of some of his ANC colleagues who would like to spend their way to electoral victory in 2019 – could come horribly undone if Gordhan is removed as minister of finance.
One worrying factor for the economy, says Mohr, is that business confidence has been so low. “The weak rand has been a major contributor to this. Companies that made strategic decisions to invest abroad when the rand was R22 to the Pound may be forced to question their future direction now that it is trading at R17 or R18 to the Pound. If the rand continues to strengthen, then we should expect to see less outflow of corporate capital from SA – which has been a major feature of the economy in recent years – and greater investment in the domestic economy.”
More than half the revenues recorded by JSE-listed companies comes from abroad. Most listed companies started diversifying their revenues a decade or more ago, and this will likely continue into the future. However, a strong rebound in the local currency might temper these international aspirations.
The threat of an investment downgrade looms over the Gordhan saga, and the chaos that would ensue if this ends badly. A tentative economic recovery would be torpedoed, and the rand would likely test levels considered unimaginable just a year ago. That’s the worst case scenario. Wiser heads expect sanity to prevail, leading to a modest economic recovery heading into 2017.