R16 or R20 to the dollar by the end of the year – the best and worst case scenario for the rand

The South African rand faces the risk of a sharp devaluation in 2024, though economists say this is incredibly unlikely.

The rand is trading at roughly R17.50/$, pulling back from the near-R17.00/$ seen at the end of September.

“After rapid strength following the recent US interest rate cut, the rand has pulled back, trading near R17.40/$, on an escalation in the war in the Middle East and the cautious tone sounded by the US Fed Chair on future interest rate cuts,” said Investec Chief Economist Annabel Bishop.

“The rand has weakened from close to R17.00/$ at the end of September, with the US surprise -50bp cut coming in the second half of September. R17.00/$ is a major resistance level and will be challenging for the rand to sustainably breakthrough.”

Volatility is set to be the norm for the rand, as it remains influenced by US data releases and commentary from monetary policy officials.

South Africa’s terms of trade have also weakened substantially, with the trade surplus moderating in the first two months of Q3 2024. Weakening global manufacturing also likely hit South Africa in the last month of Q3.

“This underpin of weakness, with global demand unlikely to have turned rapidly around in October, is likely exerting an underpin of weakness on the rand into October, now that investor risk-taking has withdrawn somewhat,” said Bishop.

“Investors have become cautious in risk-taking after Fed Chair Jerome Powell cautioned that the Fed will not likely deliver 50bp cuts at each meeting, which has seen risk assets, including EM currencies such as the rand, pull back somewhat.”

The worst-case scenario

In Investec’s severe down-case scenario, a series of international and local developments would be needed for the rand to reach R20.20 against the dollar in the final quarter of 2024.

A lot would have to go wrong for South Africa for this to happen, with the bank putting the probability of this at only 1%.

Firstly, there will need to be a form of global recession akin to the global financial crisis of 2008. There will also be insufficient monetary and other support locally and internationally.

Very high inflation due to severe weather conditions would have to emerge, and South Africa would also need all three key rating agencies to decrease its credit rating from a single B to CCC grade, increasing the credit default risk.

The government will also have to borrow from an increasingly larger pool and sink deeper into a debt trap.

Most notably, severe load shedding would have to rear its ugly head again, and widespread civil and political unrest would also have to be present.

The scenario is also marred by the failure to transition to renewable energy and implement measures to alleviate the impact of climate change on the economy, as well as limited expropriation of private property without compensation, which carries a noticeable negative economic impact.

South Africa would also need to be taken off of the FATF greylist and placed on the blacklist—all while the Russia and Ukraine war spreads into NATO, and the tensions in the Middle East worsen.

If all these events occurred, the rand would weaken to R20.20/$ this quarter and reach R20.60/$ by the end of next year.

Fortunately for South Africa, this is by far the least likely scenario to emerge for the country. At only a 1% probability, it is outweighed by even the extreme upcase scenario—at a 2% probablity—where the opposite happens, and everything goes extremely right for the country.

In the extreme upcase, the rand starts hitting closer to its ‘fair value’ of R15.00/$, breaching below those levels by the middle of 2025.

In reality, though, the most likely outcome for South Africa is the base case (50% probability), which sees the rand reaching R17.20 in Q4 2024 and R16.50 by the end of 2025.

In this scenario, things continue much as they currently are, with the rand stabilising slightly, South Africa posts modest economic growth, and global conflicts do not escalate.

The risks, however, are to the downside, with South Africa more likely to swing negative than positive.

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