The scenario for South Africa where the rand could hit R22 to the dollar
Investec’s worst-case scenario projects the rand could tank to R21.70 by the end of 2024 and sink even further to R21.90 by the end of 2025, but the chances are very slim.
On Monday (26 August), the South African rand briefly strengthened, surpassing a key resistance level of R17.70 to the US dollar.
This positive movement came as markets responded to indications from the US Federal Reserve that future interest rate cuts are likely.
Comments made by US Fed chair Jerome Powell at the Jackson Hole Symposium last week were a key driver of this sentiment, where he signalled a shift towards lowering interest rates.
Powell’s statement, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” brought relief to the markets, easing risk aversion and boosting riskier assets like the rand.
According to Annabel Bishop, chief economist at Investec, Powell’s dovish remarks calmed markets and encouraged a brief rally in risk assets, including emerging market currencies such as the rand.
However, while the rand’s strength against the dollar is encouraging, there are varied forecasts about its future performance, with a range of scenarios reflecting the uncertainty surrounding both global and domestic economic conditions.
Investec’s most extreme prediction, known as the “severe downcase” scenario, paints a bleak picture for the South African currency.
Under this model, the rand could depreciate significantly, potentially falling to R21.70 by the end of 2024 and slipping even further to R21.90 by the close of 2025.
This outcome is based on the assumption of a prolonged global recession and financial crisis, where South Africa receives inadequate support both domestically and internationally.
This grim scenario further assumes that inflation spikes again, driven by adverse weather conditions and worsening economic fundamentals.
A weakened rand would exacerbate the situation, as the country would likely borrow from a broader array of sources, ultimately plunging deeper into debt.
Severe load shedding, civil unrest, and political instability would also return, adding to the turmoil. In this case, South Africa could face downgrades from global credit rating agencies, reaching a CCC grade, which is one step above default, further increasing the risk of economic collapse.
Additionally, this scenario envisions the country being blacklisted, with the ongoing war between Russia and Ukraine spilling into neighbouring NATO countries, exacerbating global tensions.
Despite the severity of these predictions, Investec assigns only a 1% probability to this scenario, down from a previous estimate of 9%.
A more likely outcome, according to Investec’s “base case” scenario, has a 50% probability.
In this model, the rand is expected to stabilize around R17.70/USD by the fourth quarter of 2024 and strengthen slightly to R17.20/USD by the end of 2025.
This scenario assumes modest but steady economic growth for South Africa, projected to reach 3% over the next five years.
The growth would be driven by domestic policy measures, though it would still be constrained by persistent issues like load shedding and freight limitations.
Inflation, particularly food price inflation, would remain volatile due to fluctuating weather patterns.
However, a gradual transition to renewable energy sources and a slow shift away from fossil fuels is expected without causing major disruptions to the economy.
In this model, the conflicts in Russia/Ukraine and the Middle East would continue but remain contained without escalating into a broader crisis.
In the “lite down case” scenario, which Investec assigns a 35% probability, the economic situation deteriorates further.
Under this scenario, the rand could weaken again, rising above R19.00 to the dollar.
This outcome would be a result of continued economic stagnation, domestic challenges, and global uncertainty, though it would not be as severe as the severe downcase.
The “best-case scenario,” with a mere 2% probability, is much more optimistic. In this outcome, the South African rand will strengthen considerably, moving below R16/USD by the end of 2024.
This would require a significant turnaround in the country’s economic fortunes, with growth rates accelerating to between 3% and 5% initially and then rising to between 5% and 7% in subsequent years.
This scenario also assumes that South Africa will implement good governance practices, enact growth-oriented reforms, and make a swift and efficient transition to renewable energy.
It further requires the removal of structural constraints that have long hindered the country’s economic progress.
Below is an overview of Investec’s forecasts for the rand/dollar exchange rate in 2024.
Forecast | Probability | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q2 2025 | Q4 2025 |
Severe down case | 1% | R20.50/$ | R21.40/$ | R21.50/$ | R21.70/$ | R21.70/$ | R21.90/$ |
Lite (domestic) down case | 35% | R19.80/$ | R19.70/$ | R19.50/$ | R19.30/$ | R19.40/$ | R19.50/$ |
Base case | 50% | R18.00/$ | R17.70/$ | R17.60/$ | R17.50/$ | R17.40/$ | R17.20/$ |
Up case | 12% | R17.50/$ | R17.20/$ | R17.00/$ | R16.90/$ | R16.80/$ | R16.70/$ |
Extreme up case | 2% | R17.10/$ | R16.50/$ | R15.50/$ | R15.00/$ | R14.60/$ | R14.50/$ |
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