The best thing that could have happened for South Africa’s rand

The formation of the Government of National Unity (GNU) has been key to South Africa’s improved investor climate, which has, in turn, greatly bolstered the country’s currency.

Were it not for this improved investor climate, the rand would have weakened far more amid the pressures of the war in the Middle East.

This is feedback from Investec chief economist Annabel Bishop, who explained that the rand has remained remarkably resilient in the year to date.

Notably, this is not to say that the rand has not weakened this year, with the Iran war having taken its toll on emerging market currencies across the board.

However, compared to previous global crises, the rand has remained far more resilient in the face of this conflict than it has in the past.

For example, Bishop pointed out that, during the Covid-19 pandemic, from 2020 to 2022, the rand weakened from R14.00/USD to R18.40/USD. 

This means the rand lost around 23.91% of its purchasing power against the dollar over that period.

In contrast, the rand has gone from R15.81/USD before the Iran war to around R16.45/USD now, less than 4% weaker against the United States dollar.

Bishop explained that, in 2026, global risk sentiment has been substantially less affected than in the 2020 to 2022 period.

She said the domestic currency has proven notably resilient overall to the global shock to financial markets from the Middle East war.

The rand’s resilience can be attributed to numerous factors, including South Africa’s improvement in state finances, credit rating upgrades, and progress made on repairing state-owned enterprises.

Bishop said these areas of improvement were not in place in the early part of the decade, when government finances deteriorated severely instead.

In addition, she said the establishment of the GNU has been key to South Africa’s improved investor climate.

This, she said, included opposition to the ANC’s planned fiscal expansion, which did not go ahead due to severe backlash from parties within the GNU, and was instead replaced by growth-supporting measures.

“At R15.81/USD before the Middle East war, and gaining over the second quarter of 2026, the rand has not lost much ground compared to what it would likely have been if the investor climate had not strengthened over the close to two-year period before,” Bishop said.

The rand is on a roll

Another factor that has boosted the rand in recent years is the structural improvement in South Africa’s inflation rate prior to the war in the Middle East.

Bishop said that lowering South Africa’s inflation target to 3% contributed to the marked improvement in the country’s investor climate.

This has also been reflected in South Africa’s bond market, through falling bond yields and interest rate cuts.

It has also supported the strengthening of the rand from close to R19.00/USD mid-2024 to 15.81/USD this year before the outbreak of the Iran war.

“CPI inflation was at 3.1% before the Middle East war and has now risen to 4.5%, but would have seen worse deterioration if the rand and inflation were not well contained before the conflict in the Middle East began this year,” Bishop said.

Rating agency S&P has also cited these factors as reasons for its more positive outlook on South Africa’s credit rating over the past year.

The firm recently pointed to the government’s efforts to accelerate growth, business-friendly reforms, and improve service delivery.

It said these initiatives are supported by reform-minded parties in the GNU alongside the ANC, but warned that their success depends on the coalition holding and compromises being achieved.

While S&P warned of the risks of the coalition breaking apart, it said that despite significant disagreements at times, the GNU has held together and provided impetus for reform in the government.

“It has attempted to revive growth and maintain fiscal discipline, while navigating coalition politics,” it said.

“Efforts to realise private participation and public-private partnerships in the railway, ports, power, and water sectors, and to strengthen the regulatory environment could boost investment beyond our expectations.”