The rand should be at R11.30 to the US dollar

South Africa’s rand remains undervalued, with the currency’s fair value between R11.30 and R14.30 to the United States dollar.

However, the significant risk premium embedded in the local currency and current forex dynamics means the rand is now trading at around R17.15/USD, far above its fair value.

This risk premium is driven by economic policies like black economic empowerment (BEE) and expropriation without compensation, as well as South Africa’s contentious international relations with countries like the United States.

This is according to Aluma Capital chief economist Frederick Mitchell, who explained that the rand’s undervaluation points to a substantial risk premium.

Inflation differentials between South Africa and the United States from 2020 to 2025 show that the rand should be trading closer to R14.30 in a conservative estimation and potentially as low as R11.30.

However, the rand is currently trading at around R17.15/USD, which, while significantly better than the nearly R20/USD levels seen earlier this year, reveals a significant risk premium embedded in current forex dynamics.

Mitchell explained that this risk premium is driven by domestic policies that are seen as hostile to foreign investment, such as BEE and expropriation without compensation.

He said these economic strategies and South Africa’s growing government debt burden discourage capital inflow into the country and exacerbate foreign investor concerns.

These concerns are further amplified by South Africa’s contentious international stance, notably with the current Middle East conflict and the country’s alignment with global outliers like Iran, Hamas and Russia.

“Consequently, South Africa faces punitive tariffs of up to 30% on exports to the US, particularly affecting manufactured goods such as vehicles and automotive parts and agricultural products, eroding competitiveness in a major market for South African exports,” Mitchell said.

In addition to these high tariffs, South Africa risks losing its access to the African Growth and Opportunity Act (AGOA), a potential lifeline for duty-free trade with the United States.

The AGOA is a preferential trade agreement between the United States and various African countries that allows these nations to export certain goods to the US duty-free.

South Africa has been a part of this agreement since its inception and is one of its largest beneficiaries.

However, South Africa’s continued inclusion in this agreement is now uncertain as relations with the United States, particularly the Trump administration, have deteriorated over the past year.

“While a temporary extension might stave off immediate impacts, the long-term effectiveness of AGOA is compromised by existing US tariffs,” Mitchell warned. 

“With the trade program’s expiry and no bilateral deal to cushion the blow, South Africa’s export landscape appears precarious, particularly for sectors like automotive and agriculture, which already bear elevated costs due to new tariffs.”

South Africa running into trouble

Mitchell warned that these trade risks are compounded by a sharp decline in foreign direct investment, meaning South Africa confronts significant economic headwinds. 

Foreign investors have continued to dump JSE-listed shares in 2025, with non-residents selling R165 billion worth of stocks in the first eight months of 2025.

This is significantly more than the R93 billion sold in the same period in 2024, with investors increasingly looking for safety amid elevated global uncertainty and volatility.

Mitchell said the consequences of this are visible in the labour market, where formal employment dropped by 229,000 jobs from June 2024 to June 2025.

The automotive sector, a significant employer in South Africa, has been especially hard hit as vehicle exports to the US have diminished dramatically.

This has cost the nation R16.7 billion over seven months and threatens significant job cuts in South Africa.

Major car manufacturer Ford Motor Company of South Africa recently announced plans to cut 474 jobs at two of its plants in the country.

In addition, the recent closure of tyre producer Goodyear due to a global restructuring has resulted in the loss of 900 jobs.

“The employment crisis extends to community services and trade sectors, signalling broader economic distress,” Mitchell said.

Looking forward, he warned that with global economic conditions and internal missteps continuing to strain the rand’s value, inflation risks loom large. 

He said a weakened rand could prompt increased consumer costs, impacting the South African Reserve Bank’s inflation targeting and interest rate decisions. 

“This potential cycle of lowered economic output, rising unemployment, and reduced growth forecasts could further depreciate the value of the rand against the US dollar and other major currencies,” he said.