Rand forecast to strengthen in 2011

Analysts forecast that the rand will continue to strengthen in 2011 due to the weakening of the US dollar and euro currency.

However, when pitted against the currencies of other developing nations, the rand will not see any significant gains because of rising interest rates, said Ilke Smith, an economics analyst at metropolitan asset managers.

Smith said the strengthening of the rand in 2011 will come as a result of expansive monetary policies in the developed nations as well as government interventions in the form of fiscal policy, coupled with a tighter South African monetary policy when compared to countries such as the US and Britain.

She said smaller companies in the manufacturing sector were likely to bear the brunt of a stronger rand because their competitive advantage would decline in the export markets. However, she added intermediate products would do well because there would be a higher consumer demand, and importers would also benefit.

She added that the high international food and oil prices would benefit SA and would also keep the rand more subdued for a longer period. She argued that unions should embrace the stronger rand because it would keep local food prices lower.

“The notion of a weaker rand is silly, As a developing nation the stronger rand will help us get far, one shouldn't look at it as the bearer of bad news because it would ensure that domestic food prices remained low. Our debt management is also in a better position than other developed countries.

This position will ensure that we keep capital in SA and get more returns on investments.”
However, she pointed out that the stronger rand was not based on SA's economy doing well, but was based on the poor performing US dollar and pound. She added that a negative impact of the stronger rand would a deterrent to foreign direct investment because investors would be giving more of their currency to get one rand.

Annabel Bishop, an economist at Investec, said sovereign debt contagion was the single biggest risk for the rand in 2011. She said the fallout could be larger than before, which meant that the rand could weaken substantially on the sudden outflow of foreign investments due to the heightened levels of risk aversion.

“The March to May period sees the rollover of sovereign debt for many of the advanced economies at risk of bankruptcy, while January tends to see a high degree of bond issuance as governments front load sales.”

She added that second risk scenario for the rand was that the euro would continue to weaken due to the woes on the eurozone, but the rand would strengthen once again once the sovereign debt crunch in the eurozone had been overcome.

Late on Wednesday, the rand was bid 6.83 to the US dollar, 8.92 against the euro and 10.71 versus the British sterling. - Ayanda Mdluli