South Africa beaten down by 10 years of own goals
South Africa’s rand has lost over 50% of its value against the dollar over the last decade – and while external factors are certainly at play, most of the damage has been done by critical own-goals.
According to Harry Scherzer, CEO Future Forex, between 2012 and 2022 the rand lost more than 50% of its value against the US dollar – a picture that is similarly bleak when it comes to the rand’s performance against the British pound and the Euro.
“While some of those losses have been down to external causes outside South Africa’s control, the overwhelming majority have been own goals,” he said.
These major own-gaols include the failure to adequately address load shedding since 2007, the corruption that flourished during the Zuma years, and the government’s inability to meaningfully grow the economy.
This has put the rand squarely on the back foot in 2024, with even slight changes in local and global sentiment threatening to push the currency above R19 to the dollar and beyond.
While local economists still see some hope for the currency this year – projecting a probable end-point of around R17.70 to the dollar – Scherzer said there is so much uncertainty in the market and so many events that could fundamentally swing things that the outlook remains cloudy.
Global before local
“Before looking at some of the local factors that could influence the rand’s performance in 2024, it’s worth considering some of the international factors that could play a role. It’s also worth remembering how quickly things can change within that context,” he said.
The forex lead said that interest rates are a particular sticking point.
Towards the end of 2023, many analysts felt that the fact that the US had managed to bring inflation under control and avoid a recession, despite some of the most aggressive interest rate increases in history, he said.
This led to sentiment in the market where expectations were that interest rates would soon be cut.
These expectations have since been tempered by the hawkish tone coming from major central banks, where the first interest cuts are now only expected to come around mid-year.
“Those expectations may be further tempered by the ongoing war in Ukraine and the escalating conflicts in the Middle East, which continue to impact supply chains. As a result, investors could hold on to the relative stability of treasury bonds, bolstering dollar strength,” Scherzer said.
Another potentially big factor when it comes to currency performance in 2024 is elections, Scherzer said.
While South Africans will go to the polls later this year, so will many other countries, including major economies such as the USA, UK, and India.
“The outcomes of those foreign elections could play a significant role in whether money flows into or out of emerging markets, something which has knock-on effects for the rand.”
Own goals continue
Locally, the uncertainty surrounding the country’s most important elections since 1994 means that investors will likely remain cautious.
“That lack of investor confidence will have an impact on the rand, as will the ongoing crises at Eskom and Transnet,” Scherzer said.
The forex lead noted that there were some positives working for South Africa – such as the massive jump in rooftop solar in the country. This will work to mitigate the dire state of Eskom and the prevailing power crisis.
Other boosts have come from some towns, like the Free State town of Clarens, managing their own electricity through load curtailment.
“If this pilot proves successful and the concept can be rolled out more widely, then it may help ensure businesses across the country can continue operating at full steam,” Scherzer said.
On the economics side, inflation is also slowing, meaning that the Reserve Bank may be able to cut interest rates – most likely shortly after the US does – which should boost consumer confidence and give the economy a shot in the arm.
Lower interest rates would also allow investors to take bigger risks, further boosting the economy and the rand, he said.
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