Pula seen widening gains against dollar

Brian Benza | Friday February 3, 2017 14:49

 

In a commentary titled Africa Markets Revealed, analysts at Standard Bank say despite the slightly flatter crawl, their view of a much stronger seven percent appreciation of the South African rand relative to the dollar leads to the belief that the pula should still appreciate against the dollar this year.

“We expect dollar/pula to close the year around 10.05, from some 10.65 presently. This view of an appreciation is contrary to the forward curve’s pricing of a modest depreciation over the coming 12 months,” the analysts said.

Effective January this year, the Ministry of Finance and Economic Development adjusted the weight of the rand and Special Drawing Rights (SDR) in the pula basket to 45% and 55% respectively, from 50% each.

The rate of crawl was also changed from an upward crawl of 0.38% per annum to a slightly lower upward crawl of 0.26% as the monetary authorities expect a narrower differential between Botswana’s inflation and that of key trading partners.

Despite the reduction of the rand weight, the South African currency still remains the dominant factor in determining the movement of the pula.

“When the rand weighting in the pula basket was 50% in 2016, the rand accounted for 85% of the volatility or risk in the movement of the pula against the dollar, if the new weights of 45% to rand were existent in 2016, then the rand would have accounted for 82% of the dollar to pula volatility. Hence, the rand remains the major determinant for how the pula moves,”  Research manager at FNBB, Moatlhodi Sebabole, said.

Under the crawling peg policy, the Bank of Botswana (BoB) manages pula’s value in a ‘basket of currencies’ assigning weights to each currency.

The bank uses the ‘crawling peg’ system or regular precise adjustments, to appropriately review the pula’s value.

The pula basket of currencies   comprises the South African rand and the IMF Special Drawing Rights (SDR), consisting of the dollar, Japanese yen, the euro, the British pound and the Chinese Renminbi.

According to data released by the BoB this week, in the 12 months to January 2017, the pula gained against the dollar (8.5%), pound (24.9%), euro (10.6%) and yen (2.1%) while it depreciated against the rand (8.8%).

The 8.5% appreciation of the pula against the dollar in the last 12 months means government got less pulas from its dollar based exports, mainly diamonds.