Rand under pressure – but hope remains

The rand has weakened significantly over the past few weeks, but a credit rating upgrade for South Africa could give the currency the boost it needs.

Investec chief economist Annabel Bishop said the rand continues to run above R18.00/USD, as risk aversion has increased towards commodity and emerging market currencies.

The rand has been on a losing streak since the US election on 5 November 2024. Prior to the election, the rand had been trading at around R17.46 to the US dollar.

However, since Donald Trump’s victory was announced, the rand’s value has dropped significantly, as the US dollar gained on safe-haven inflows into US treasuries over concerns of a weaker global outlook, higher US inflation, and fewer US interest rate cuts.

The rand reached R18.64/USD on Friday, 15 November, the weakest it had been since August before the US began its interest rate cut cycle in September, and financial markets began factoring in expectations of the cut.

Bishop explained that US dollar strength has been key in weakening the rand, with safe haven flows into US treasuries, which are expected to see higher interest rates for longer, as sharp cuts in the US interest rate cycle are no longer expected. 

However, some hope has come in the form of a credit rating outlook upgrade from S&P, which upped South Africa’s rating to ‘positive’, which 

The rand then strengthened over the weekend to R18.09/USD on Monday, 18 November, as the Standard and Poor’s (S&P) credit rating agency upgraded SA’s credit outlook to positive.

This means South Africa could be eligible for a rating upgrade, which would significantly boost the rand’s value. 

S&P’s rationale for the outlook upgrade was increased political stability following South Africa’s general elections in May this year and impetus for reform that could boost private investment and GDP growth.

“Since the formation of the new broad coalition of 11 political parties under the Government of National Unity (GNU), debt yields and portfolio inflows have improved, leading to easing financing conditions and currency strengthening,” the agency said.

Bishop explained that S&P has removed the large political risk component for South Africa now that the GNU has proved stable.

This has allowed the outlook to brighten due to increased political stability, and so stronger investment and growth are expected.

“Despite the government publishing weaker fiscal projections in the most recent Medium Term Budget Policy Statement (MTBPS), we see higher fiscal policy predictability regarding efforts toward achieving primary surpluses and fiscal consolidation,” S&P said.

“We, therefore, lowered our forecasts for the change in net general government debt to 5.3% of GDP on average over fiscal years 2024 to 2027, from 6.0% in our previous review.”

However, the rating agency warned that there are some risks to South Africa’s fiscal health that remain.

For example, spending pressure and risks to wages, social spending, and transfers to state-owned enterprises will keep gross general government debt levels rising to 80% of GDP by the 2027 fiscal year.

This is above the National Treasury’s estimates, which forecast debt stabilising at 75% of GDP by 2026.

In response to the outlook upgrade, the National Treasury said it is focused on achieving fiscal sustainability, maintaining macroeconomic stability, implementing structural reforms, building state capability and supporting growth-enhancing public infrastructure investment.

“Our ratings on South Africa benefit from the sizable and sophisticated financial system that provides a deep funding base for the government. The country has relatively strong institutions, particularly its central bank,” S&P said.

“In our view, the SARB’s proactive monetary policy response has slowed consumer price increases, and we expect inflation to inch below the midpoint of the SARB’s 3% to 6% target range.”

Bishop said that, since the market volatility of the past few weeks and S&P’s rating outlook upgrade, the rand has settled around R18.13/USD.

She said it will likely try to track below R18.00/USD towards the R17.70/USD mark, with the shock of the US election outcome easing for markets on a wait-and-see attitude.

“The rand has remained volatile and highly sensitive, gaining markedly on positive news. Some concerns linger over the recent fiscal slippage in the MTBPS, but consolidation is expected, and fiscal policy predictability is higher,” she said.