Rand buckles under mounting uncertainty

The rand has hovered around R19/USD over the past week as the local currency felt the pressure of rising uncertainty surrounding South Africa’s fiscal policy and elections.

This is the view of Investec chief economist Annabel Bishop, who said multiple factors are dragging down the rand. As such, the currency remains undervalued. 

She said the volatile domestic currency sagged under the populist slant of President Cyril Ramaphosa’s State of the Nation Address (SONA) last week, which also failed to see urgent measures to reduce severe growth impediments.

In addition, the upcoming Budget next week is expected to show that the government likely missed the budget it set for itself in the Medium-Term Budget Policy Statement in November last year, meaning efforts to control fiscal spending are still on hold.

South Africa’s economic growth in 2023 has also disappointed, with the economy at risk of a recession.

Investec expects that Q4 2023 data will reveal stagnant economic growth, but there is the potential for a recession. It also expects overall weak economic growth to be reported for 2023.

Stats SA is set to release Q4 2023’s GDP data in March. 

Another factor weighing negatively on the rand is the political heat that has increased substantially this year ahead of the national elections.

The uncertainty ahead of South Africa’s election is putting a damper on the domestic currency, with the date not yet set. The election is expected to take place between 21 May and 19 August.

The lack of political stability in South Africa has also had a negative effect, with ANC support continuing to fracture in polls and a changing political landscape emerging. 

However, the election polls consistently show that the ANC will see support drop below 50%, with some below 40%, while there are strong political differences amongst the main opposition parties. 

“While it is too early to rely on the election poll outcomes for any firm predictions of exact results, a coalition government is the most likely outcome, which is seen to add to volatility,” Bishop said.

Internationally, data from the United States added to market expectations that the US will not cut its interest rates next month.

Federal Reserve chair Jerome Powell recently said rate cuts are “not likely” to happen in March, and markets have also been pushing back May expectations. 

In addition, the US economy continues to see growth outshine expectations, quashing concerns over recession as a ‘soft landing’ is highly likely.

This has reduced the chance for US rate cuts and has seen some further rand and other emerging market (EM) currencies weakness.

Bishop explained that most EM currencies are weaker year on year and even when compared to the start of 2024, with the rand remaining around the bottom quarter of the Bloomberg EM currency ranker. 

“The pushing back of the timing of the first occurrence of US interest rate cuts in the anticipated cycle has had a marked effect on market sentiment and weakened EM currencies across the board,” she said.

Additionally, South Africa’s equity market has weakened as a consequence, as the pushback on the timing of US interest rates also pushed back the timing of South Africa’s first cut in the repo rate. 

She added that foreigners remain net sellers of South African equities.