Rand on a winning streak – but beware the fall
Economists say the rand’s recent winning streak is set to continue through the end of the year, with the local unit likely to hold its ground in the R17.80 to R18.30 range, or perform even better.
However, much of the unit’s strength is being driven by positive sentiment, which doesn’t resolve the many issued that are baked into the economy. Thus, everything hinges on the ‘good times’ lasting, and the government delivering on promised reforms.
According to currency expert Bianca Botes, Director at Citadel Global, the rand is one of only five emerging market currencies—out of a total of 23—that has been trading stronger than the dollar, year-to-date.
It ranked third among outperformers in the past month, setting the currency up nicely to maintain an overall stronger position until the end of the year.
“The relatively strong rand-to-dollar exchange rate range we foresee for the end of 2024 depends on certain variables and assumptions used; however, we believe there is room for the rand to gain even more ground – to end off the year much stronger than these levels if a few things work in favour of the EM basket of currencies,” Botes said.
Botes said the main factor driving the rand’s strength is the formation of the Government of National Unity (GNU), which has been positively received by markets. This has unwound some of the risk premia that were priced into the rand.
“We have also seen some positive policy come to the fore. In the longer term, the rand will, however, take its cues from global events, specifically the dollar performance and announcements by the US Federal Reserve. The softer dollar is supportive of the rand,” she said.
Importantly, the rand’s relative strength cannot be attributed to South African factors alone.
“Locally, we still need to see if the current state of electricity in the country can be sustained, if logistical matters such as Transnet can be resolved, and if further reforms can create a business-friendly environment to stimulate growth and employment.
“From a more holistic perspective, you need a risk on the environment and rising commodity prices for EM currencies—and especially those which are commodity driven such as the rand—to benefit,” she said.
The GNU-factor
The positivity around the GNU is a particular risk factor for the rand.
Speaking at the South African Institute of Taxation’s annual Tax Indaba on Monday (9 September), macroeconomic analyst Phumlani Majozi warned that the ‘good vibes’ around the GNU could still fizzle out.
He said that a similar market reaction was seen at the start of President Cyril Ramaphosa’s previous term—dubbed ‘Ramaphoria’—which did not last. However, he said the positive sentiment is still a good start for the way forward for South Africa as a whole.
Also speaking at the event, Konstantin Makrelov, head of economic research at the South African Reserve Bank (SARB), said that while the GNU is important for shifting sentiment, it needs to implement economic reforms for the positivity to last.
Looking more broadly, however, he said that the rand has deeply depreciated against the US dollar over the past 20 years and that this is built into the economy, especially in terms of productivity and inflation.
Specifically, Makrelov said the rand couldn’t help but depreciate against the dollar when South Africa’s inflation target (4.5%) is much higher than that of its trade partners (between 2% and 3%).
It’s also impossible for the currency to strengthen significantly, while trade differentials are also unfavourable versus other economies.
The country also has baked-in issues like low growth (averaging 0.5% versus population growth of 1.5%, which is bad news), high levels of unemployment, logistical challenges, crime, corruption, and gross mismanagement.
However, by dealing with as many domestic factors as possible—described as “getting our house in order”—through the GNU’s promised reforms, the rand could definitely stand to benefit.
Botes said that reforms that offer hope include stabilising the energy supply, fiscal reform and discipline, greater government efforts to collaborate with the private sector, and an apparent surge in investment.
“These developments could mark the beginning of a sustained period of growth for South Africa. If the GNU can maintain cohesion and implement necessary reforms, the country could see a significant improvement in its economic performance over the coming years.”
Global influences
One thing that cannot be discounted is the impact of the global economy on the rand.
Majozi said the currency simply cannot be taken out of the global context, particularly due to various geopolitical conflicts and political anxieties in major markets.
According to Botes, global risk sentiment has flip-flopped throughout the year, and when the risk appetite in the global sphere turns positive, the rand typically benefits from the yield-seeking behaviour.
One of the most important factors influencing the rand is still the strength of the US economy and the hopefully soon-to-change interest rate-cutting cycle of the US Fed that markets have been anticipating since the beginning of the year, she said.
“Specific events, such as the upcoming US election, are sure to cause some volatility in the market,” she added.
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