As worries about the economic outlook grow, can the rand recover? – Photo: Shutterstock

After showing strong resilience for most of 2022, the South African Rand (ZAR) has started to come under pressure as inflationary pressures begin to cloud its economic outlook.

After losing 0.4% against the US dollar in the week of March 28, the rand continued to lose ground this week as data showed producer price inflation continued to rise in February. . On Friday, the USD/ZAR exchange rate was up 0.12% at 14.74, capping another week of losses for the rand.

dollar to south african rand (USD/ZAR)

Some say the rand will recover

Economists are divided on whether the rand’s fortunes may swing in the coming weeks. While some see the SARB tightening and rising economic activity as a positive, others say there are headwinds ahead.

“On a slightly positive note, the rand has remained resilient on the back of high precious metal prices, despite the Fed raising rates for the first time since 2018. Although cost pressures are mounting, a lackluster economic environment will likely limit the ability of producers to pass cost increases on to consumers,” South African bank Nedbank said in a note.

In addition, the bank also expects a better economic outlook and expectations of tighter monetary policy from the SARB limited the decline of the rand.

Uncertain economic outlook

Similarly, according to ABSA Bank, economic activity appears to have picked up in March with key indicators such as retail spending and footfall at places of economic activity increasing.

The bank, however, added that there were downside risks to watch going forward.

“Looking ahead, however, supply chain disruptions could escalate again due to China’s zero-COVID19 lockdown policies and the Russian-Ukrainian conflict, while a projected fifth wave of the pandemic and load shedding also remain potential downside risks,” the bank said in a statement. Remark.

Headwinds for the economy

South Africa’s Purchasing Managers’ Index (PMI) for March also sent mixed signals about the strength of the economy in the months ahead. According to S&P Global, South Africa’s PMI for March hit a four-month high of 51.9.

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But David Owen, an economist at S&P Global, said the rise in the global PMI doesn’t tell the whole story.

“A rise in the headline PMI masked heightened price and supply risks in the South African economy in March. Price data indicated the second-fastest increase in production loads in nearly 11 years. in survey history, with companies seeing a substantial increase in costs as a result of rising fuel and material prices.While the upsurge was largely driven by volatility in commodity markets due to the war in Ukraine, which is expected to ease over time, has added to the already strong inflationary pressures from the pandemic which appear to be more lingering,” he said.

“With these headwinds on growth still in play, companies showed the least confidence in future activity since August last year. Despite the decline in production, companies also increased their purchases at the pace the faster in ten months with the aim of building up safety stocks and offsetting at least some of the expected rise in input prices over the next few months,” he added.

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