The rand can strengthen to below R16 to the US dollar in 2026

Investec chief economist Annabel Bishop sees the rand averaging R15.90 to the United States dollar in the fourth quarter of 2026, as the currency has held up well against shocks from the Middle East war.

In her base-case scenario for 2026, Bishop expects the rand to average above R16/USD in the second and third quarters of the year.

In this scenario, South Africa also experiences modest economic growth, rising to around 3% over the next five years. 

Bishop also sees South Africa’s BB credit rating remaining, though she noted that some fiscal consolidation and a resultant stabilisation of the country’s debt-to-GDP ratio could lead to upgrades.

For this scenario to play out, geopolitical tensions must not exacerbate markedly, and the war in the Middle East must be short, having little impact on South Africa’s GDP.

This should see the rand stabilise and then strengthen somewhat toward the end of the year. 

The rand recently benefited from Fitch’s upgrade of South Africa’s credit rating from BB- to BB, on the back of the country’s prudent fiscal management and measures of fiscal consolidation.

Despite South Africa’s poor economic conditions and external shocks, Fitch commended the country’s fiscal consolidation efforts and the stabilisation of its debt-to-GDP ratio.

The rating agency noted that South Africa’s debt-to-GDP ratio is set to reach levels far below where it was when Fitch downgraded the country to BB- in 2020.

The firm also sees South Africa’s inflation returning to the new 3% target in 2027, though this may come on the back of another interest rate hike later this year.

Fitch explained that ongoing structural reforms should enable the country’s growth to moderately increase in the next few years. 

Notably, a BB rating still means South Africa is in so-called “junk status”, i.e. considered sub-investment grade, but this upgrade is still a move in the right direction.

To see another credit rating upgrade and escape junk status, South Africa will need to see a substantial and sustained decline in its debt-to-GDP ratio.

For this to happen, South Africa must achieve persistently large fiscal primary surpluses and see a reduction in debt service costs, with the government currently paying around R1.2 billion a day in interest.

The graph below shows the rand’s performance against the United States dollar over the past month.

Rand going from zero to hero

Bishop said the rand ran stronger to R16.22/USD after Fitch’s upgrade, and strengthened against the euro and pound too. However, the local currency then weakened again due to the worsening of the Middle East war. 

“The rand continues to run volatile this year, albeit at lower extremes than in past risk-off periods,” Bishop said.

Over the past few decades, the rand has developed a reputation for volatility, earning itself the nickname ‘The Rattler’ among some traders.

However, the rand appears to be outgrowing this nickname as it enters a more mature stage, characterised by less volatility than in years prior.

The rand’s maturation is clearly evident in its response to the current Middle East war. While the currency has undoubtedly been volatile, its movements have not been nearly as extreme as they were during past global shocks.

Bishop noted the reduced volatility, adding that the local currency has also gained recently following the Reserve Bank’s May repo rate hike.

She previously explained that South Africa’s interest rate differential with the United States is expected to widen in 2026, which will further support the local currency.

Therefore, Bishop’s base-case scenario sees the rand ending the year at around R15.90 against the greenback.

However, before that happens, the rand is expected to average R16.60/USD in the second quarter and R16.30/USD in the third quarter.

For early 2027, Bishop sees the rand remaining below the R16/USD mark, strengthening to R15.70 against the US dollar in the first quarter.