Investec’s worst-case scenario projects the rand could tank to R21.40 by the end of 2024 and sink even further to R21.90 by the end of 2025.<\/p>\n\n\n\n
In the banking group’s outlook scenarios, the rand has a low probability of weakening to R21.40 to the US dollar in 2024 and even further to R21.90 by the end of next year in a worst-case scenario (which it calls the severe down case). <\/p>\n\n\n\n
The rand has already been under pressure over the past week due to several factors weighing it down.<\/p>\n\n\n\n
According to Annabel Bishop, chief economist at Investec, the worst case has a very low probability and is driven by delayed US interest rate cuts, a US recession (low probability), inflation concerns, and severely worsening conflict in the Middle East.<\/p>\n\n\n\n
The most probable outcome for the rand is to end the year averaging between R18.17 and R19.09 – but risks remain.<\/p>\n\n\n\n
Emerging market currencies, including the rand, have historically strengthened during US interest rate cut cycles.<\/p>\n\n\n\n
However, despite expectations of a US rate-cut cycle, ongoing delays have caused the domestic currency to weaken in recent sessions.<\/p>\n\n\n\n
Last week, the rand remained around R19.00\/USD as the US saw a week of data that didn’t convince financial markets that the US would begin cutting its interest rates in Q4 2024. <\/p>\n\n\n\n
This has affected the rand and other factors, such as the actions of the other two big players.<\/p>\n\n\n\n
Potential escalation of the Middle East conflict could have a strong effect on limiting growth. Escalations could also raise oil prices and inflation, triggering tighter monetary policy from central banks and increasing the risk of no relief this year.<\/p>\n\n\n\n
Domestically, risk aversion is high ahead of the May 29th elections. <\/p>\n\n\n\n
While this was attributed to the rand\u2019s weakness last week, economists quickly pointed out that it was not a significant factor.<\/p>\n\n\n\n
Scenarios<\/strong><\/p>\n\n\n\n Investec’s base case scenario<\/strong> (45% probability) predicts that the rand will be valued at R18.20\/USD in the second quarter of this year and will average R18.17\/USD in 2024.<\/p>\n\n\n\n This forecast is based on a scenario where South Africa’s economic growth is modest but expected to increase to 2% over five years, supported by domestic policy measures. <\/p>\n\n\n\n However, growth is still limited by load-shedding and freight constraints. The forecast also assumes that the rand will stabilise and strengthen somewhat. <\/p>\n\n\n\n Inflation will be affected by weather patterns, which could lead to food price inflation. <\/p>\n\n\n\n Moreover, some expropriation will occur without compensation, but it will not negatively impact the economy, and the conflicts in Russia\/Ukraine and the Middle East will continue without worsening.<\/p>\n\n\n\n Another likely scenario is the lite down case<\/strong> (43% probability), where conditions deteriorate and the rand ends up back over R19.00 to the dollar, averaging R19.09<\/strong>.<\/p>\n\n\n\n In the best-case scenario<\/strong> (1% probability) , the South African rand is predicted to have an average exchange rate of R16.99\/USD for the year.<\/p>\n\n\n\n This scenario assumes that the country’s economy will initially experience a growth rate of between 3% to 5% and then 5% to 7% thereafter. <\/p>\n\n\n\n It also assumes that South Africa will have good governance, growth-oriented reforms, and the elimination of any structural constraints. <\/p>\n\n\n\n In this scenario, there will be no nationalisation or expropriation without compensation, and South Africa will have only been on the greylist for 18 months.<\/p>\n\n\n\n However, Investec’s severe down case<\/strong> (9% probability) for the rand this year predicts the currency will average R20.40\/USD.<\/p>\n\n\n\n In this scenario, there is a prolonged global recession and financial crisis, with inadequate domestic and international support. <\/p>\n\n\n\n The situation also assumes very high inflation, adverse weather conditions, and severe weakening of the rand. <\/p>\n\n\n\n Furthermore, it is assumed that the government borrows from a broader range of sources and falls deeper into a debt trap. <\/p>\n\n\n\n Additionally, there is severe load-shedding and civil and political unrest. The scenario also assumes that South Africa is blacklisted and the Russian-Ukraine war expands into neighbouring NATO countries.<\/p>\n\n\n\n Below is an overview of Investec\u2019s forecasts for the rand\/dollar exchange rate in 2024.<\/p>\n\n\n\nForecast<\/strong><\/td> Probability<\/strong><\/td> Q1 2024<\/strong><\/td> Q2 2024<\/strong><\/td> Q3 2024<\/strong><\/td> Q4 2023<\/strong><\/td> Average<\/strong><\/td><\/tr> Severe down case<\/td> 9%<\/td> 18.87<\/td> 20.50<\/td> 21.20<\/td> 21.40<\/td> 20.49<\/strong><\/td><\/tr> Lite (domestic) down case<\/td> 43%<\/td> 18.87<\/td> 19.00<\/td> 19.20<\/td> 19.30<\/td> 19.09<\/strong><\/td><\/tr> Base case<\/td> 45%<\/td> 18.87<\/td> 18.20<\/td> 17.90<\/td> 17.70<\/td> 18.17<\/strong><\/td><\/tr> Up case<\/td> 2%<\/td> 18.87<\/td> 17.50<\/td> 17.20<\/td> 17.00<\/td> 17.64<\/strong><\/td><\/tr> Extreme up case<\/td> 1%<\/td> 18.87<\/td> 17.10<\/td> 16.50<\/td> 15.50<\/td> 16.99<\/strong><\/td><\/tr><\/tbody><\/table><\/div><\/figure>\n\n\n\n