Goldman’s Contrarian View on South Africa’s Rand

JOHANNESBURG (Capital Markets in Africa) – There’s still some momentum left in South African rand’s rally, according to Goldman Sachs Group Inc.

The 148-year-old Wall Street lender predicts the currency will extend its 17 percent gain since the beginning of 2016 to end the year at 13 per dollar, a level last seen in 2015. That’s a view shared by only three out of 26 analysts in a Bloomberg survey: the median forecast is for the currency of Africa’s biggest economy is to weaken about 9 percent to 14.61, from 13.30 on Wednesday.

These four charts explain why Goldman is constructive on the rand and South African bonds.

Trend Reversal
The rand had weakened on a trend basis for five years through 2015, both against emerging-market peers and other South African asset classes, as the country’s trade balance worsened, the economy slowed and political risks increased. Since 2016, the currency has bucked the trend, outperforming peers for the first time in six years. 

While some of those gains could be seen as a reversal from a slump caused by the firing of Finance Minister Nhlanhla Nene in December 2015, the magnitude of the recovery may represent a structural shift, Andrew Matheny, a Moscow-based economist at Goldman, wrote in a Jan. 23 report.

“Most of the headwinds to the rand in the period from 2011-2015 are now fading, with the macro outlook improving and with space remaining for political risk to re-price lower,” Matheny said. “This argues for a cyclically and structurally more positive view on the rand.”

Economy’s Gains
South Africa’s economic growth is forecast to accelerate this year after the country barely avoided a recession in 2016. More importantly for the rand, the current-account deficit is narrowing while the real interest rate — the difference between the policy rate and the inflation rate — is rising after the central bank tightened policy by 200 basis points in two years. That makes the rand less vulnerable to capital outflows as U.S. yields rise.

Political Risk Fades
The rand slumped to a record after President Jacob Zuma unexpectedly fired Nene in December 2015 and replaced him with a little-known lawmaker, an event now referred to as “Nenegate”. Though Zuma was forced to recant, re-appointing the respected Pravin Gordhan to the position that he held from 2009 to 2014, worries about the president’s commitment to fiscal discipline persisted.

Credit-default swap spreads — though still higher than those of similarly rated peers — have returned to pre-“Nenegate levels”, indicating that political risks are subsiding, Matheny said.

“Further re-pricing lower by the market of political risk could imply a further 4 percent to 5 percent upside for the rand,” Matheny said.

Global Environment
South Africa’s terms of trade — a measure of the value of a country’s exports versus its imports — improved in 2016 as commodity prices recovered. Raw materials including precious and industrial metals and coal account for about 60 percent of South Africa’s exports, while it is a net importer of oil.

“Over the course of 2016, higher bulk and precious metals prices implied an improvement in South Africa’s terms of trade and thereby also contributed significantly to the strengthening of the rand,” Matheny said. “With global growth improving, we see near-term risks to bulk commodity prices as tilted to the upside,” implying the rand is poised for more gains, he said.