How the rand could hit R21 to the dollar in 2025

South Africa’s rand could reach near R21/$ by the end of 2025 if global and domestic conditions take a turn for the worse, but this is seen as highly unlikely.

Investec Chief Economist Annabel Bishop said that the rand averaged R17.92/$ for the first two and half months of Q4.24, but then weakened sharply in the second half of December to R18.91/$.

The US monetary policy meeting on the 18th of December saw a quickening in inflation forecasts for the US for 2025 from 2.0% y/y to 2.5% y/y, which has led to concerns about fewer US rate cuts.

Fewer US interest rate cuts are supportive of a stronger US dollar, which led to to US dollar strengthening in the second half of December and has been instrumental in weakening the rand.

Financial markets now only expect one cut in the US interest rate cycle, with it most likely taking place in June.

The sharp change in US interest rate market expectations led to the rand dropping against the dollar from R17.70/$ to R18.87/$ in the second half of December.

US GDP growth is also expected to be a bit stronger in 2025, rising to 2.1% from 2.0% y/y.

The rand has been far less volatile against the pound and euro, while the approaching government change in the US has led to improved expectations on GDP growth, employment and equities in the US.

Bishop added that the rand is likely to see a weaker outcome than previously expected this year due to the large downgrading of the change in market expectations for US interest rate cuts.

Bishop said that GDP growth has been subdued by blockages at the ports and on the rails, which will provide a severe brake on GDP growth in 2025, even if the outlook is slightly better than in 2024.

Substantial increases in electricity tariffs have also been a significant burden on economic growth in SA, as have increases in other costs of doing business in South Africa, while water outages have increased.

She added that major increases in electricity tariffs have also been a significant burden on economic growth in South Africa, with further increases on the cards for 2025.

The electricity price increases have already increased the cost of doing business in South Africa, while water outages are not helping matters.

Worst-case scenario

Bishop’s analysis also showed a possibility of the rand ending in 2025 at R20.70/$.

For this to happen, there will need to be a lengthy global recession and global financial crisis, with insufficient monetary and other support domestically and internationally.

There will also be high inflation due to adverse weather conditions, leading to severe rand weakness.

SA’s credit rating is also downgraded to CCC grade from all three major firms, with an increased risk of default.

The government will also borrow from increasingly wider sources and will sink deeper into a debt trap.

There will also be widespread, severe service problems, such as heightened levels of load shedding, as well as severe civil and political unrest.

Bishop added that there would be a failure to transition to renewable energy and measures to alleviate the impact of climate change on the economy.

There would also be limited expropriation of private property without compensation with a noticeable negative economic impact.

South Africa’s efforts to get off the greylist head in the opposite direction, with the country blacklisted.

Globally, the Russian/Ukraine war widens into neighbouring (NATO) countries, and the Middle East tensions worsen.

However, the chance of the rand ending the year at this level stands at 1%.

Its base case scenario sees the rand strengthening somewhat to R17.90/$ by the end of the year, sticking above an average of R18.00/$ until Q4 2025.

On the positive end of the scale, Investec’s extreme up case sees the rand strengthening to R14.50 by the year-end, but this only has a 2% chance of happening.

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