USD/ZAR: Global recovery to encourage a stronger rand but domestic debt situation remains a concern – MUFG

The South African rand recovered against the US dollar in June. Analysts at MUFG Bank expect the currency to rand to continue to rise versus the greenback at a slow pace. They see USD/ZAR trading in the 16.600-18.000 range during the third quarter. 

Key Quotes:

“The rand has rebounded against the US dollar as it continues to reverse the sell-off in March. The rand has benefitted from the broad-based improvement in investor sentiment towards emerging market currencies. The improvement in financial market conditions is encouraging a further drop in FX volatility which is favourable for high yielding carry currencies like the rand. The rand still remains one of the highest yielding emerging market currencies.”

“The government and the SARB both expect South Africa’s economy to contract sharply this year, by around 7% followed by a modest rebound of between 2% and 4% next year. The Treasury’s supplementary budget clearly highlighted South Africa’s challenging fiscal position with the budget deficit now expected to widen out to 14.6% of GDP. The government has committed to taking active steps to implement major reforms and consolidate the budget in an attempt to help stabilize debt at just under 90% of GDP by 2023/24. The plan envisages spending reduction and revenue adjustments totalling up to ZAR250 billion over the next two years which could undermine the recovery.”

“In these circumstances, we expect the rand to strengthen modestly in the year ahead but it is subject to downside risks from challenging domestic debt dynamics.”