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Rand takes another dip against US dollar

Home National Rand takes another dip against US dollar

WINDHOEK – Local goods exported to foreign markets are set to become cheaper, which would translate into higher earnings, thanks to the weakening of the rand, and by extension the Namibian dollar, against major currencies such as the US dollar and the Euro. 

“However, the flip side of this advantage is that imports that are priced in US dollar become pricier and could in some instances erode the benefit of depreciation and thus could lead to higher inflation,” said Daniel Motinga, the Senior Manager Research and Development at FNB Namibia. The rand has been weakening against the US dollar since 2013, and yesterday was trading at above R11.20 against the US dollar for the first time in years. Analysts have said the weakening of the rand against major currencies reflects the continuing sell-off in emerging markets, as the market looks at the US Federal Reserve’s monetary policy setting committee meeting, a crucial meeting for the currencies of developing countries. Past and on-going industrial unrest across the various sectors of the economy in South Africa have also contributed to the weakening of the rand, with South Africa registering slow growth compared to other emerging markets. “What is clearly worsening this scenario since May 2013 is the pending recovery in the US and other mature economies, which implies a greater flow of funds away from emerging markets such as South Africa as real interest rates increase abroad. The impact on the Namibian economy is essentially through the balance of payments to the extent that our exports coincide with the weakening cycle. It is not a given that this coincidence of the timing of the weak Rand/Namibian dollar and exports will take place. So in theory we expect exporters to benefit and importers to pay a bit more during the weakening exchange rate cycle,” said Motinga.

He advised that during the current crises importers should lock in the rand – or rather should have done it earlier already – to minimise losses, while exporters will probably make a bit more money due to the exchange rate. With regard to the future outlook Motinga added that the core view is that the exchange rate against some of the key crosses such as the US dollar would remain undervalued by between 10 percent and 15 percent and is likely to strengthen towards year-end from the current levels. In the interim there are structural risks that could see the exchange weaken to N$12 against the US dollar, but he thinks it would subsequently revert to around N$10.20 to the US dollar. The biggest risk to the consumer could come from the interest rate environment if the central bank would raise interest rates, because of further exchange rate blowouts. “A key issue, from an inflationary point of view is also what would happen to the crude oil price as it is a key driver of production cost and thus holds risks for inflation. In our view we do not see significant strengthening in the global oil price linked to demand risk associated with the Chinese growth trajectory, as well as the fact that the global recovery is still in its early days. So, in summary, we think the impact on inflation will be limited during this phase of the currency depreciation,” said Motinga. He advised that the Namibia economy would be a bit under pressure as the primary mandate of the South African Reserve Bank is to control price stability and if they saw significant risk on the inflation expectations front they could hike interest rates prematurely. “A hike in interest rates for this year is however not our core view. We think the calculus of weak growth and weakening domestic demand in the South African macro-environment should override inflation concerns in the interim. However, a significant weakening in the exchange rate driven in part by a sudden stop in foreign capital flows in favour of South Africa would almost certainly call for a rate hike,” he said.

 

By Staff Reporter