South Africa’s rand is expected to reach an all-time record of R19 to the dollar by the end of this year, Nomura International research analyst Peter Attard-Montalto said on Friday.
In its latest research report, ‘Strategy Insights – South Africa: Where should ZAR be?’, Nomura unpacked several models forecasting the year ahead for a country facing a downgrade, a widening current account deficit, capital flight and looming US Federal Reserve interest hike.
“We think R18.37 to R19 as a target range for year-end makes sense. This seems big, but the rand/dollar rate was up 35% last year. We are pencilling in a 22.1% increase from end-December or 18.8% from current levels,” Attard-Montalto said.
The rand, which was initially forecast to reach R16 this year, could weaken even further should the country experience further political dislocation, an accelerated downgrade, heightened trade pressures or a faster-than-expected Federal rate hikes.
Acknowledging room for adjustments and error, he explained that the rand predictions would be adjusted downwards on a faster South African Reserve Bank (SARB) rate hiking, positive political and growth policy developments or a meaningful shift out in the downgrade narrative.
The unpredictable and liquidity dependent currency movement was mostly attributed to capital outflows from local retail investors using their offshore limits; a lack of foreigner inflows and investors looking to catch the bottom and subsequent turnaround of “Brazil as a 2016 theme”; and SARB rate hikes, higher core inflation and the widening of the current account deficit from -4.1% of gross domestic product in the third quarter of 2015 to -5% by the end of 2016.
“All of this suggests to us a steady – but orderly – weakening. The question is levels,” he concluded.