Not too many variables

The rand - a worst case scenario looming?

Denzil Burger - a senior portfolio manager at Old Mutual SA - asks what happened to the rand, and highlights what has changed since the beginning of the year?  He was speaking at the Old Mutual retail conference.

Burger says that the rand has largely re-priced, and on the whole is good for the local economy. And sharp SARB increases could however, upset this applecart.

Looking back to the beginning of the year, the risks were increasing and the economy was becoming susceptible to a rand correction. The correction was large when compared to other emerging markets - the rand dropped by 30% over six months, and it can't be explained by the dollar movement alone.

The weakening has been significant, when viewed over the last 20 years, against the New Zealand, Australia and Turkey. Comparing the local currency levels and weakness, to Australia, there is one major difference - foreign direct investment is the key, and it has underpinned the Australian growth and its currency strength.

South Africa on the other hand had its current account deficit financed by foreign interest in the local market and its equities - fund flows - which are notoriously fickle, and recently foreigners were taking a neutral position on SA as an emerging market.

The local market is no longer cheap and the easy money has been made, when looking on a forward rating basis.

So can the currency drop further, asks Burger? Well, to provide a little bit of a perspective consider this: According to Anil Thakersee - MD of Old Mutual Unit Trusts - the rand has been flat over the last 20 years, and surprisingly at the same flat level over 35 years. So the perception of volatility may be misplaced, over the long term.

There are concerns in terms of global growth and the high level of commodity prices. If it slows and commodity prices drop, this then becomes the worst-case scenario for SA, and the rand will not escape.

The one silver lining is the increase in infrastructure spending, which is driven by the government, although its effects will take some time to filter through. On the down side any political developments will place pressure on the rand.

Health warning - this article does not offer advice, and simply provides a view on the local currency.