Rex Column 13 March 2017
by Cees Bruggemans words 950
The temptation with Rand prospects is to see it through its home lenses only. We certainly have enough noise in our DNA to create volatility and cyclicality. And at times of exceptional events, such as internal political shocks of old, the world became a bystander to our own doings in shaping the Rand.
These times are mostly played out, even if a residual remains, as we could see with Nene-gate.
Interestingly, in another context, there are aspects to our global exposure that have also mostly played out due to their deepening sunset condition. For our exposure to commodities has greatly reduced, in particular precious metals which in olden days had the power to set in motion enormous incoming and outgoing tides of national income, for years reshaping our financial and economic condition in particular ways.
It is the reduced importance of these precious metals in our economic make-up after years of receding output that our Rand volatility needs to be sought elsewhere. Political events probably still have the power to shape, to the extent to which they can change our institutional arrangements, the issuance of our foreign debt, the accepted level of our inflation, the consequential level of our interest rates and the impact this can have on the appetite of foreign investors for our government bonds. Just so the policies shaping our growth and the attractiveness of our company equities.
Provided we retain the old quality of our financial institutions, and the high reputation attached thereto, we have a self-sustaining quality even in very difficult times in the global arena.
The cyclicality and volatility remaining may appear to be a residual in its own right but isn't. For we are still a large sophisticated Emerging Market play in global risk markets, in turn shaped mostly by conditions in these markets, something that takes place far away from us and to which we are mere bystanders.
In this we aren't alone. There are a host of Emerging Markets with varying risk/reward profiles that are subject to this same source of global volatility and cyclicality shaping them.
The main global source is the American economic and financial system, with Europe, Japan and China also big and growing influences.
The disturbers of the peace here in the past decade are primarily the Anglo-Saxon debt crisis, and the European follow-up crises.
In their aftermath came the fallout of the consequences of addressing these crises.
From the rich world we inherited their very low interest rate environment and low currency values, in turn making our own asset valuations more attractive and supporting us through global search for yield.
In the event, the change in direction of Chinese policy as a consequence of global crisis and reduced growth and trade prospects, ended the global commodity supercycle and enforced a major contraction on many exposed Emerging Markets. This force over the past year seems to have mainly played out.
What we are left with today as an ongoing force are the Anglo-Saxons and their European & Japanese satellites as they steadily keep repositioning post-crisis.
Here we notice the long growth recuperation ending, transforming into a more stable, faster growth cycle, certainly in the West, with rising interest rate levels across the yield curve, but this differentiating between regions.
As growth stories and financial revival differentiate, yield spreads between region change, becoming reflected in a rising Dollar.
This is now the great lead drummer for the Emerging World after the demise of the Chinese-inspired global commodity supercycle. With US rates & spreads rising, so is the Dollar, inviting lesser currencies to lose in relative position.
For the Rand, both 2016 and 2017/2018 were and may prove to be momentous years. Whereas 2016 offered us the uncertain spectacle of Nene-gate recovery, on the back of Fed capitulation, giving reduced US rate expectations and Dollar, the 2017/2018 period is driven by something quite different, indeed its reversal.
Ending of US recuperation and Fed capitulation, revitalizing both growth and rate prospects and with it a rising Dollar inviting smaller currencies to accept a lesser position.
The Rand having recovered from close to 18:$ a year ago to a touch below 13:$ recently, these global forces appear to have topped out and are now ready to acquire a greater momentum in the opposite direction.
Not necessarily of a crisis variety, as in 2015, or of the clawback variety of 2016, but nonetheless a gradual repositioning, possibly orderly achieved as long as the Fed doesn't feel threatened of being behind the curve in raising rates.
The outlook therefore seems to be dominated by a gradual US rate tightening and spread widening and a firming Dollar building thereon. It suggests a weaker Rand/Dollar closer to 14-15 this year, rather than a continuation of Rand firming as seen throughout 2016.
Provided this process keeps unfolding orderly, there need not be undue concern at the SARB regarding our inflation prospects projected as 5%-6%. There will nevertheless still be a risk residue keeping SARB vigilant.
This non-provocative Rand & rate outlook could still be tested from home sources, like a Nene-gate 15 months ago, as the political leadership tussle in this country nears its decisive moment in the second half of 2017.
So there always remains a chance for out-layer scenarios, to the downside in the event of an evil outcome and to the upside if the forces of modernity were to win through. For the time being these remain tail risks (low probability, big impact) until we get nearer their materialising.
Until then, it is the American evolution and global response to it that will set our clocks too, with great precision. More gradual Rand weakness ahead until we reach the real speed bumps in the road of our own making later this.
Bruggemans & Associates, Consulting Economists