2021: An FX Outlook

While this is a risk-on environment (which again would normally spell good news for the rand), Keenan warns that much of that optimism has been priced into the market already. Furthermore, while the global environment may appear supportive of an extended rand recovery, one should not lose sight of South Africa’s lingering domestic challenges.

“We still have relatively weak growth, and although inflation is probably going to turn up in 2021, the South African Reserve Bank is unlikely to hike policy rates because of that weak growth,” Keenan says. “That will potentially hurt the rand, because our real interest rates (interest rates adjusted for inflation) will probably move into negative territory over the coming quarters.”

Despite rays of post-pandemic hope, South Africa remains under a fiscal cloud. “It’s going to take time for those clouds to clear,” says Keenan. “We’ve already had a number of downgrades, and the chances of an upgrade are probably unlikely in the near term as we continue to grapple with this pandemic.”

Parallels can be – and have been – drawn between this crisis and previous economic meltdowns. But Keenan says the events of 2020 were more broad-based than 2001’s dotcom crisis or 2008’s housing market collapse.

“This has been much more far-reaching, and there hasn’t been a burst in any particular asset price bubble,” he explains. “Instead, 2020 saw a burst in trust and confidence. People are probably going to be nervous about too much exposure to other people, and that will crimp supply chains. Countries may now want to produce certain goods internally, and the fact that we had the US-China trade war going into 2020 only accentuates that.”

Yet Keenan remains upbeat. He draws parallels to the 1920s, when – after the devastation of the Spanish flu – economies rebounded. “Economies had to rebuild, and it was a boom time for commodities,” he says. “I’m hoping that we’re heading for a repeat of the Roaring Twenties, a century later. The 1920s and 2020s appear to share some similar characteristics, and that gives us hope. We’ve seen the human ability to bounce back from devastating pandemics before, and that can be repeated, as long as we have the will to do so.”

He uses the analogy of a veld fire to illustrate his point. “It’s devastating when it happens, and a lot is destroyed, but after the fire you see an incredible rebirth. Similarly, after the pandemic we can either choose to roll over and say that life will never be the same again, or we can see this as an opportunity to reflect and re-engage in a new and better way. I think humans are naturally biased towards finding the new path forward, and South Africa is particularly well placed in that environment. There’s a lot of hidden entrepreneurial spirit in this country that will take advantage of these kinds of opportunities. We can’t roll over. We have to make the best of a bad situation.”