The scenario that would push the rand to its worst levels in history against US dollar

While the South African rand has been on a winning streak recently and the prospects remain relatively positive for 2025, there is still a chance it could fall to R20.50/USD—the worst level in history. 

The South African rand made substantial gains this week, appreciating by 1.7% to trade at R18.28 against the US dollar, as markets anticipate interest rate cuts in the United States.

According to Investec chief economist Annabel Bishop, this marks a notable improvement from the recent average of around R18.88/USD.

She said the rally in the rand has been fuelled mainly by weaker-than-expected US economic data, which showed a mild contraction of -0.3% in the first quarter of 2025.

Bishop attributed the decline primarily to a sharp 4.8% drop in net exports, as US imports surged ahead of planned tariff hikes in April, timed for what she described as “US liberation day.” 

She noted that the GDP dip is not necessarily a sign of an impending recession but rather a consequence of stockpiling to avoid higher import costs.

“The import jump was largely counteracted by lifts in private inventories, fixed investment, and personal consumption. The data indicates the early disruptive nature of the US trade war.”

Bishop expects second-quarter data to show more muted tariff-related impacts, but sentiment remains “risk-on,” which supports emerging market currencies like the rand. 

“The rand is likely to benefit further this month as it likely subsides back towards R18.00/USD, with the domestic currency currently on track to average R18.60/USD this quarter,” she added.

While recession risks in the US have receded—from 60% to 40%—Bishop warned that a slowdown in the world’s largest economy could still trigger global knock-on effects, particularly for fiscally fragile countries like South Africa.

Locally, political tensions are weighing on sentiment. Bishop flagged calls within the ANC to oust the DA from the Government of National Unity (GNU) as a key concern. 

This follows a bruising clash over the national budget and contentious VAT hikes, which the DA opposed.

Although a revised budget excluding the VAT hike is expected on 21 May, investor confidence has been rattled.

“Markets are now waiting for the government to deliver on its promised reforms,” Bishop said, adding that political instability is keeping the rand from returning to its sub-R18/USD levels seen in late 2024.

The scenario where the rand hits the worst level in history

While Investec’s base case scenario (50% probablity) is that the rand will continue to strengthen toward R18.00 to the dollar in 2025, the next most likely scenario sees the unit going the other way.

In the bank’s “Lite down” economic scenario, there is a 32% chance that the could rand weaken to historic lows, reaching R20.50/USD by the end of 2025.

This would be the rand’s weakest performance against the US dollar after recently reaching this milestone on 9 April, where it hit R19.93/USD. 

In this scenario, international risk sentiment remains neutral, but South Africa’s debt situation deteriorates as the government fails to see its projections stabilise.

This would result in the country falling into single B (local and foreign currency) credit ratings from all three agencies, including Moody’s, Fitch Ratings, and S&P Global. 

This scenario would also see a recession in the country, with business confidence depressed. Load shedding and infrastructure constraints worsen, leading to weak investment and civil unrest. 

It also includes other negative factors, such as high inflation due to unfavourable weather conditions, rand weakness, and transtions to cleaner energy stalling.

The forecast also sees limited expropriation of private sector property without compensation—something which is a highly contentious issue in the country at present.

Under these circumstances, the rand would hit its worst-ever levels (again) in Q3, continuing to deteriorate towards the end of the year.

The more likely scenario for South Africa

Fortunately, this is not the expected scenario for South Africa.

In the more likely base case scenario (50%), economic growth is modest but lifts towards 3% year-on-year over five years with sufficient domestic policy support measures.

However, structural constraints still limit growth, such as the ongoing troubles in freight and infrastructure.

Global financial market sentiment is expected to remain neutral to positive, and credit rating agencies are more optimistic.

South Africa is in the BB credit rating category as fiscal consolidation (debt-to-GDP stabilisation) occurs, leading to positive outlooks. 

This would result in the rand stabilising and strengthening somewhat.

The scenario also sees measures implemented to alleviate the impact of climate change on the economy. 

At the same time, very little expropriation without compensation occurs, which has no significant adverse effect on the economy.

This economic case results in the rand moving positively, around R18.00/USD by the end of 2025.