At the outset of 2024, some of the more optimistic banks and analysts forecast that there was scope for the rand to power to R16/$ by the end of the year. But despite the optimism surrounding the formation of the Government of National Unity (GNU) and hope for interest rate cuts in the US, the rand didn’t get close to that level at any point during the year.
Instead, after opening 2024 at R18.28/$, we saw the rand briefly touch a two-year-high of R17.02/$ in September – a gain of 7.5%. Over the course of 2024, the rand traded at levels ranging between R17.10 to R19.30, depending on the level of the dollar, sentiment about South Africa-specific factors, as well as international macroeconomic circumstances.
Ultimately, however, the rand weakened by over 10% from its strongest levels in September to R18.85/$, ending 2024 around 3.11% weaker for the year. That doesn’t sound impressive given the rosy outlook for the currency at the onset of the year and the optimism following the formation of the GNU in June. Although the rand surrendered most of its gains in the face of a resurgent dollar, not only did it depreciate less against the dollar than most emerging market peers, it weakened less than the yen and Swiss franc!
The rand’s fortunes during the third quarter of 2024 were bolstered by positive South Africa-specific developments: The formation of a GNU that includes the market-friendly Democratic Alliance to the exclusion of populist parties with radical economic agendas; a pause in load shedding; a surge in fixed investment; low inflation; and certain structural reforms.
Dollar dominance and local hurdles
Combined with signs that global inflation was cooling and that the Fed would start cutting interest rates, this created conditions for the rand to flourish. But by the last quarter of the year, not only was the dollar still surging, but a sense of realism about South Africa’s prospects was starting to set in.
With regards to the resurgent dollar, the Fed signalled in December that it would be relatively cautious about cutting interest rates because the US labour market and economy remained so strong. Furthermore, an election result that has put Donald Trump and the Republicans in a commanding position may set the stage for continued dollar strength.
Trump’s America-first policies – such as higher tariffs and tighter migration laws – may fuel inflation, which, in turn, reduces the Fed’s scope for rate cuts during 2025. Furthermore, having a disruptor in the White House during a time of geopolitical volatility may well exacerbate uncertainty, which would prompt a flight to the dollar as a safe haven.
South Africa factors weighing on the rand
When it comes to South Africa-specific factors, which was also a major contributor to the rand’s weakness in December, we believe that 2025 is the year that the GNU will need to walk the talk. While the energy and infrastructure reforms we have seen are encouraging, we remain doubtful that the GNU, and particularly the ANC, will have the wherewithal to drive through the changes needed to turbocharge GDP growth.
Multiple other infrastructural challenges are constraining the economy. Ports and rail are drastically underperforming, while water crises are developing in several parts of the country. Many local authorities are struggling with basic services provision, exacerbated by the escalating debt owed in rates and taxes, electricity, and water.
Furthermore, the government’s fiscal situation is precarious with a growing deficit and an all-time high debt-to-GDP ratio above 72%. These metrics are unlikely to change without the reforms for which leading politicians have little appetite, especially with policies such as National Health Insurance (NHI) still in play – meaning South Africa is likely to underperform.
What is the fair value for the rand?
These local and international factors are all considered in our Currency Decoder, which we have used successfully over the years to calculate an estimated fair value of the rand, and which is updated dynamically on a weekly basis. The rand strengthened slightly this week following better-than-expected inflation in the US to around R18.78/$, after weakening below R19/$ earlier this year. Our Decoder had fair value for the rand on Monday at R19.30/$, implying that the spot rate was trading at a premium to fair value. Our weekly note also pointed out that the US dollar spot index is currently overbought, which could lead to some short-term rand strength.
From a Dynasty perspective, we remain committed to offshore investment for most of our investors. This view is not only supported by our medium-term view of a structurally weak currency but also that South Africa’s equity market still lags the broader global indices in terms of dollar growth, while the local investment case remains relatively weak. After all, we regard our high-net-worth clients as “global citizens,” and, as such, we position their portfolios to maximise and protect growth in dollar terms.