Rand overvalued, will depreciate

JOHANNESBURG – South Africa’s rand is about 12 per cent overvalued on a real trade-weighted basis, and is set to depreciate by 22 per cent by the end of 2005, Merrill Lynch said in a research note received by Reuters yesterday.

The domestic unit is confounding markets with the extent of its gains during a sustained 2-1/2 year rally, which has driven it nearly 80 per cent firmer against the dollar since December 2001, to a 5-1/2 year peak of 5,87/dollar last month. Its gains have prompted a raft of warnings from the country’s top exporters -particularly miners- that they may have to cut jobs and planned investment as domestic earnings fall, eroding profits.Merrill Lynch predicted that the unit, now at 6,15/dollar, would slip to 6,60/dollar by the end of 2004 and 7,75/dollar by the end of 2005 – pressured by weaker commodity prices, and a narrower interest rate differential with the rest of the world.The shortfall in South Africa’s current account – a country’s broadest measure of trade – would exacerbate the trend, expanding to more than three per cent of gross domestic product in 2005, Merrill said in an August 6 research note.This is well beyond the official current account deficit forecast of 1,8 per cent of GDP next year, and compares with a gap of just 0,8 per cent of GDP in 2003.At the end of 2005, the rand was likely to be trading at 10,39 against the euro, Merrill Lynch added.It was trading at 7,54 against the single currency on Tuesday.-Nampa-ReutersIts gains have prompted a raft of warnings from the country’s top exporters -particularly miners- that they may have to cut jobs and planned investment as domestic earnings fall, eroding profits.Merrill Lynch predicted that the unit, now at 6,15/dollar, would slip to 6,60/dollar by the end of 2004 and 7,75/dollar by the end of 2005 – pressured by weaker commodity prices, and a narrower interest rate differential with the rest of the world.The shortfall in South Africa’s current account – a country’s broadest measure of trade – would exacerbate the trend, expanding to more than three per cent of gross domestic product in 2005, Merrill said in an August 6 research note.This is well beyond the official current account deficit forecast of 1,8 per cent of GDP next year, and compares with a gap of just 0,8 per cent of GDP in 2003.At the end of 2005, the rand was likely to be trading at 10,39 against the euro, Merrill Lynch added.It was trading at 7,54 against the single currency on Tuesday.-Nampa-Reuters