Standard Bank reveals its fair value of the rand

The current fair value of the rand, including the significant risk premium attached to South Africa, is between R17.80/USD and R18/USD. 

This is feedback from Standard Bank chief economist Goolam Ballim, who outlined the bank’s macroeconomic forecasts for the coming years at its Economy 2025 presentation. 

Ballim explained that the coming years will be incredibly volatile as the changes occurring in the global economy are not merely cyclical but structural. 

It appears that the wave of globalisation has ended with a fracturing of global trade and the rules-based world order. 

Strangely, the country that has benefitted the most from this system, the United States, appears to be leading the charge against its dismantling.

These changes make it difficult to forecast far into the future, with projections likely to change significantly throughout 2025 as new data comes in. 

One thing that is clear is that the US dollar will continue to strengthen as investors turn to it as a relatively safe haven amid this increasing uncertainty.

Since Trump won the US presidential election in November 2024, the rand has been on the back foot as global capital flowed into the US and out of emerging markets. 

This has been coupled with rand weakness driven by fluctuating tensions amid partners in the Government of National Unity (GNU). 

Ballim described this as a double whammy for the currency, weakening it to levels seen pre-GNU. 

This double whammy can be seen in the graph below, which shows the rand’s strength versus its emerging market peers. 

After the GNU’s formation, the rand strengthened versus other emerging market currencies, and the dollar became the standout performer in 2024. 

However, towards the end of 2024 and at the beginning of 2025, this picture has flipped, with the currency weakening over the dollar and emerging market currencies. 

Despite this weakening, Ballim does not think the rand has fallen far from its fair value, considering the idiosyncratic risks of South Africa. 

The fair value of a currency is most commonly calculated using inflation differentials or by using Purchasing Power Parity (PPP). 

These methods are based on the fact that the rand will naturally adjust to ensure South African exports are priced competitively worldwide.

Ballim’s calculations point to the rand’s fair value being between R17.80/USD and R18/USD – not far off its current level of R18.44/USD. 

Indices such as the Big Mac Index indicate that the rand’s fair value is much stronger than this, closer to R12/USD and even as low as R9/USD.

However, these do not include the significant risk premium attached to South Africa, which results in the rand trading far below this fair value. 

This premium has largely been driven by the country’s stagnant economy, high government debt levels and increased policy uncertainty. 

In the short term, the value of a currency is determined by sentiment, but over a longer view, it will be driven by economic performance and other fundamentals. 

Ballim projected that the rand would likely average around R18.20/USD in 2025 before strengthening to R17.68/USD in 2026. 

He explained that the rand will remain under pressure given the elevated level of uncertainty in global markets and the potential for a significant trade war. 

The graph below shows how the rand has closely tracked its fair value, including the risk premium, since 2000. 

It also indicates the rand has over-weakened recently, meaning it should strengthen back to its fair value. However, it is very difficult to predict when this strengthening will occur.