South Africa's rand is expected to weaken more than five percent over the coming year in anticipation of a credit rating downgrade, further infighting in the ruling African National Congress party and the prospect of faster US interest rate rises.
The ANC is due to pick a successor next December to President Jacob Zuma - who this week survived calls for his resignation - as the party prepares for national elections in 2019. A Reuters poll taken this week of 37 economists and foreign exchange strategists forecast the rand would weaken to 14.7500 from current levels of 14 per dollar, similar to predictions made last month.
The most bullish forecaster said the rand would break through the psychological level of 13 per dollar in 12 months. The most bearish predicted for 17.50. "As it stands, I am still a rand bear, as I can't see economic growth picking up meaningfully enough to avoid a credit rating downgrade to junk status," said Christopher Shiells, senior emerging markets analyst at Informa Global Markets in London.
"This may not come from S&P on Friday, but I think it will come in 2017," Shiells said. "I see policy paralysis, ANC infighting and more uncertainty defining 2017 in the run-up to the ANC's elective conference." Ratings agency Standard and Poor's is expected to give a credit review on South Africa on Friday. Last Friday, Fitch and Moody's kept ratings stable, although Fitch cut its outlook to negative because of political risk and low growth.
A Reuters poll in August suggested at least S&P could cut the rating to junk this year. S&P and Fitch are one notch above speculative grade. Moody's is two levels above junk The rand may also come under pressure from the threat of more Fed rate increases in 2017 than previously expected, as a result of President-elect Donald Trump's reflationary tax cut plans.
Rising inflation caused by higher oil prices after the Organisation of Petroleum Exporting Countries decided to reduce output poses another risk. The rand is up almost 10 percent this year, making it one of the top three performers in a list of 20 emerging market currencies tracked by Reuters. But that contrasts with its economic performance and near-term prospects. "Our fundamental outlook for South Africa growth remains soft, and rising US yields will see investors exit South Africa and seek out safer returns elsewhere in emerging markets," Shiells said.