What needs to happen to get the rand back to R14 to the dollar
South Africa’s currency is experiencing a period of strength, but there is a slim chance it could strengthen substantially by the end of 2025.
According to Investec Chief Economist Annabel Bishop, the rand continues to break through the R17.70/$ critical resistance level due to the weakness of the US dollar ahead of the anticipated cut in US interest rates on Wednesday.
For the next twelve months, 2.5% of US rate cuts are priced in, strengthening the rand.
The South African Reserve Bank is expected to follow the Fed’s lead by cutting rates on Thursday (19 September). Many economists anticipate a 25 basis point cut.
“South Africa has fewer monetary policy meetings (the FOMC meets every six weeks and the MPC every two months), and the rand has seen some strength on the expected widening differential between SA and US interest rates,” added Bishop.
She added that the change in sentiment towards South Africa following the Government of National Unity (GNU) should also not be underestimated. Since the election, the GNU has played a crucial role in stabilising the rand, as foreigners have purchased R18.5 billion in South African bonds.
Load shedding has also not occurred in over 170 days, and the nation is unlikely to see it return beyond stage two in the near term.
“For Q4.24, we continue to expect an average of R17.70/$ next year and breach the R17.00/$ resistance level by 2026 at least, if not sooner, as the US is expected to have a quicker and deeper interest rate cut cycle than SA, bolstering the rand.”
These predictions form part of Investec’s base case scenario, which it believes has a 50% chance of occurring.
However, there is an incredibly slim chance that the rand will hit R14.50 by the end of 2024, bringing it back in line with its levels in 2022.
Extreme Up Case
Invetec’s extreme economic scenario says the rand could strengthen to R16.50 by Q4 2024 and reach R14.50 by the end of Q4 2025.
For this to occur, South Africa’s economic growth would need to rise between 3% and 5% and then to 7% in the medium term. This is unlikely, given that the nation is only expected to hit around 1% growth in 2024 and 2% in 2025.
Good governance, growth-creating reforms, substantial property rights and no nationalisation without compensation are also essential for the rand to improve its performance.
There also has to be high business confidence and strong fixed investment growth.
Fiscal consolidation, which the National Treasury is trying to implement, would also have to reach levels seen in the 2000s.
This is another highly unlikely outcome. South Africa’s debt to GDP stood at 26% in FY2008, and Fitch believes it will rise to 76% in FY2024.
Subdued domestic inflation, fueled by extreme rand strength and favourable weather conditions, would also be needed.
The country would also need a very short greylisting. The SARB and National Treasury expect to be off the list in 2025, but others have expressed doubts, saying that key conditions—such as prosecutions for corruption and money laundering—have not been met.
The repo rate would have to decline from its 15-year high of 8.25% to 5.25% by Q4 2025, with a 75 basis point cut needed when the SARB meets this week. While deeper cuts to the interest rate have been mentioned, the chances of this are slim.
South Africa would also need a very rapid upgrade in its credit ratings.
A decisive transition from fossil fuel usage, a quick transition to renewable energy, and comprehensive measures to alleviate climate change’s impact on the economy are also key conditions.
Looking beyond South Africa, strong global growth, a risk-on-investment approach, and a commodity boom will be needed. The war between Russia and Ukraine will also need to end quickly.
Investec’s extreme up case only has a 2% chance of occurring.
Although this is better than the 1% chance of a severe downturn—in which the rand will hit R21.90/$ by the end of 2025—it is still presents a highly unlikely outcome for the local unit.
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