Good and bad scenarios for the rand – between R17 and R22 per US dollar

Efficient Group chief economist Dawie Roodt said the performance of South Africa’s new government of national unity (GNU) could either see the rand return to fair value or plunge to R22 per US Dollar.

Before this year’s elections, the rand and local markets saw some hesitant gains but struggled to find direction as the outcome remained uncertain.

The ANC losing its majority and forming a government of national unity (GNU) with opposition parties saw South Africa’s rand and assets rally as the markets viewed this as a positive outcome.

Some volatility ensued when President Cyril Ramaphosa’s new cabinet announcement was delayed, with the rand jumping back up to over R18 to the US dollar.

However, the local currency seemed to approve of the new cabinet. The rand extended its post-election rally after Ramaphosa announced his new cabinet, which he said would prioritise rapid and sustainable growth.

Analysts at Rand Merchant Bank told Bloomberg that Ramaphosa’s retention of Enoch Godongwana as Finance Minister was particularly significant for domestic markets.

They said the reappointment signals a continuation of a prudent fiscal approach and adherence to projections outlined in the February budget and medium-term expenditure framework.

The analysts added that momentum indicators suggest further rand appreciation is likely this week, and they predicted the rand would move toward R17.90/USD.

This positive market reaction sparked hope for a sustained strong currency going forward, as the GNU is set to take the reins for the next five years. 

However, GNU critics have also warned that this optimism will be short-lived, as the political hurdles this new government faces could lead to severe market uncertainty.

Roodt told Daily Investor that there are two possible scenarios for the rand’s performance following the new government’s election.

“The first is a very good scenario. And that is where they do all the right things,” he said.

If the GNU can perform and show true reform of the country, the rand can easily appreciate and return to R17/USD  in the short term. 

In the medium to long term, Roodt expects the currency to gradually depreciate, at roughly 2% to 3% annually against the US dollar. 

In the longer term, assuming the GNU “does all the right things,” South Africans could expect the rand to continue gradually depreciating against the US dollar at around 3%.

Roodt’s second outcome is a bad scenario in which the GNU succumbs to political hurdles and collapses, and another political formation takes over in South Africa. 

This would see the rand plummet, and the currency would very soon exceed R20/USD, even reaching R22/USD.

Roodt pegs the fair value of the currency at between R17/USD and R17.5/USD. 

“And that is something I think can be achieved if all the right things are done,” he said. “I must tell you, between these two scenarios, I’m quite optimistic. But I must also say that I will be surprised if this coalition really lasts for the full five years.” 

Roodt described the short-term rand strength South Africans can expect to see as a “honeymoon period”.

“Let’s hope that they’re going to fix things, and let’s hope they get a little bit closer to one another because they have to form a real team to get this economy growing again,” he said. 

“But there is certainly a reason to be optimistic about the future of the South African currency and the South African economy as well. But as always, politicians can always disappoint us.”

Warning for South Africa’s GNU

In June this year, rating agency S&P Global said South Africa’s new government of national unity would likely not cause a significant policy shift.

However, it warned that ideological differences between parties could destabilise the government.

S&P said the election outcome is more favourable for the economic and fiscal outlook than the alternatives. 

“Nevertheless, we expect the government will face an uphill battle to revive growth and maintain fiscal discipline while navigating the new realities of coalition politics,” it said.

It explained that, despite the reasonably constructive outcome, significant ideological differences between the ANC and the DA on issues such as affirmative action and foreign policy could destabilise the government. 

While increased political participation and a push from the more market-oriented DA could drive stronger reform momentum, coalitions are untested at the national level.

“At the provincial and municipal levels, coalitions have been volatile and resulted in a high turnover of mayors,” the firm said. 

“Moreover, attempts by the main left-leaning opposition parties, uMkhonto weSizwe and Economic Freedom Fighters, to block legislation could increase instability.”