Rand expected to weaken almost eight percent this year

Difficulty in holding down public spending in South Africa and the possibility that interest rates will rise rapidly in the United States are likely to wipe out the rand's early gains this year and lead to its weakening further in 12 months, a Reuters poll showed on Tuesday. The South African currency is expected to weaken almost 8 percent to 14.43 per dollar in a year, according to a median of up to 39 strategists in a poll taken February 2 to February 6. It is currently trading around 13.40.
"We are still concerned about some of the domestic fundamentals, sluggish growth, (and) whether or not we can achieve the fiscal consolidation," said Absa currency strategist Mike Keenan.
That means ratings downgrades are still a possibility this year, possibly in the first half of the year, Keenan said.
South Africa got a reprieve in December when all three major credit ratings agencies kept their ratings stable. Standard and Poor's and Fitch's ratings are both one level above junk status, Moody's two notches above.
Moody's, which put South Africa on negative watch in its review, is due to revisit that on April 7, followed by S&P at the beginning of June.
The South African Treasury will have a chance to reassure credit agencies it is keeping to its commitment to reduce public debt when it holds its budget review in just over two weeks.
Political tensions and weak economic growth in South Africa are the biggest challenge to its sovereign credit rating. S&P noted that infighting in the ruling African National Congress party may derail efforts to improve policy implementation.
The rand has gained over three percent since the beginning of the year, along with other emerging market currencies. US President Donald Trump's harsh protectionist rhetoric has increased demand for riskier currencies.
"The currency has strengthened quite a lot, so we do not see the rand as grossly undervalued as it was this time last year. We now think it is close to fair value. So for us the currency has already recovered substantially," Keenan said.
However, a lot of Trump's proposed policies - including increased spending on infrastructure - promise to push up inflation in the United States, changing the outlook for rates.
"The chances of more rate hikes have declined in South Africa, whilst in the US the risk is that they hike rates more aggressively than what is currently priced into the market," Keenan said.
South Africa's repo rate, now 7 percent, is not expected to change this year. Inflation is expected to average 5.5 percent. The US Federal Reserve, which raised rates in December, has forecast three rate increases this year. The latest Reuters poll of Wall Street dealers found they expect only two.