Rand’s fair value revealed

The rand has held its own so far in 2025, with the currency strengthening by over 6% versus the United States dollar amid increased global uncertainty. 

However, the currency remains far off its fair value on a purchasing power parity (PPP) basis, which values the rand closer to R11.54 per dollar. 

The rand is unlikely to reach this level, with the gap largely being due to South Africa’s relatively high historical inflation rate, the heightened political risk associated with the country, and the state’s deteriorating financial health. 

The currency’s weakening over the past 15 years is also emblematic of South Africa’s poor economic performance, with growth averaging an annual rate of 1.1%. 

This is feedback from Old Mutual chief economist Johann Els, who outlined the rand’s fair value at his recent mid-year macroeconomic update. 

Els explained that the rand has benefited from a weaker dollar so far in 2025, with it weakening against other major currencies such as the euro and pound. 

This reflects increasing concern regarding the United States’ financial health and the impact of major changes to its trade policy. 

Typically, a weak dollar is combined with better emerging market growth and stronger currencies in these economies, such as the rand. 

A stronger rand will aid the local inflation picture by minimising the impact of increases in international oil prices on local prices. 

Els expects the rand to continue strengthening in the short term, with it trading far weaker than its fair value and stronger economic data expected to come out of South Africa. 

He estimates the rand’s fair value to be at R11.54 to the US dollar, significantly below its current level of R17.57 as of 16:50 on 23 July 2025.

Previously, Els explained to Daily Investor how he uses inflation differentials to calculate the fair value of the rand. 

Using the difference in producer price inflation between the United States and South Africa, Els can derive where the rand should be trading if the inflation rates were the same. 

Els uses this method as the rand will naturally adjust to ensure South African exports are priced competitively around the world in US dollars.

Thus, as local inflation is higher than in the US, the rand should depreciate by the difference to make the exports competitive.

He said the rand tends to swing between being undervalued and overvalued as it is a relatively volatile currency used as a proxy for investor sentiment towards emerging markets and is buffeted by global forces. 

A currency should always return to its fair value. The only question is when that will happen.

Why the rand is not at its fair value

The fair value level of R11.54, even according to PPP, does not include the significant risk premium attached to South African assets. 

With this risk premium attached, the rand’s value should be between R17.80 and R18 to the US dollar. The risk stems largely from policy uncertainty and the government’s deteriorating finances. 

South Africa’s lacklustre economic growth over the past 15 years also plays a role, with a sustained pick-up in activity likely to translate into a much stronger currency. 

While Els believes this is possible and that the rand will strengthen in the short term, he does not think it can reach its fair value level without sustained economic growth, improved government finances, and substantial upgrades to the country’s credit rating. 

“This cycle is similar to what was seen in 2020 to 2021. During the Covid-19 lockdown, the rand hit R19/USD. It then went from R19/USD in April 2020 to R13.50/USD in June 2021,” Els said. 

“People do not think the rand can trend like that, and it has in the past when the climate was right.” 

Such an extensive gain versus the dollar is often driven by global factors, particularly the US interest rate cycle and the Chinese economy. 

While these two forces appear to be positively impacting the value of the rand, Els does not think they will be enough to bring the currency down to R11.54/USD.

“So, this time around, I also think the rand can come back quite substantially because of lower US interest rates combined with increased risk appetite from investors. All of that will benefit the rand,” he said.

“As far as I am concerned, the single biggest risk affecting the currency’s value in the short term is sentiment. That is why you see it strengthening recently, but its long-term trajectory is determined by economic performance.”

The rand is typically around 50% undervalued compared to its fair value, due to the elevated policy and fiscal risk of investing in South Africa.

This means, with the risk added, the South African currency trades at the R17.50 to R18.50 range.

The graph below, courtesy of Old Mutual Investment Group, shows just how elevated the risk premium is in South Africa, with its impact on interest rates shown. The fiscal risk has an estimated upward impact of over 2% on interest rates.