One thing stopping the rand from collapsing

The rand has largely held its own in 2025 due to the reduced risk premium associated with South Africa since the Government of National Unity (GNU) was formed. 

This is feedback from Nedbank chief economist Nicky Weimar, who explained that investors are currently giving South Africa the benefit of the doubt. 

Weimar explained that the Reserve Bank will be watching the rand closely amid increased global uncertainty and the intensification of the US-China trade war. 

These promise to boost the dollar in the short term and weaken emerging market currencies like the rand. 

Furthermore, US President Trump’s attacks on South Africa are expected to gradually weaken the local currency as foreign investors look to ‘Trump-proof’ their investments. 

Despite this, the rand has held its own since Trump ascended to the White House and has not spiked to over R20 to the US dollar as some expected. 

“The rand has weakened, but let me tell you, it has not fallen through the floor. It has not done anything crazy,” Weimar said during a Nedbank CIB presentation. 

“It has just weakened a bit. It went from R17.50 to the dollar to trading between R18 and R19 to the greenback. So, it is weaker, but not that much weaker to be inflationary.” 

Weimar explained that this is largely due to the decreased risk premium attached to South African assets since the GNU was formed in June 2024.

This makes local assets relatively more attractive and results in money flowing into fixed-income assets, such as government bonds. 

“South Africa’s risk premium has come all the way down after the election. It has really been dramatic,” she said. 

“That is what has helped to strengthen the rand. That is what has helped to bring inflation down, and that is what has created the space for the interest rate cuts we have seen so far.” 

While this has held strong so far, it is highly dependent on what is presented in the Budget Speech on 12 March and whether the GNU holds. 

“If there is anything that suggests it is breaking, it will hurt the rand. But, so far, the risk premium has remained low even though its strength has been tested.” 

Weimar explained that the reduction in the risk premium attached to South African assets has been under pressure in recent months. 

“If things are going too well for us in South Africa, we decide to make life impossible for ourselves or at least very difficult.” 

“So, we enacted the Expropriation Act after the NHI was signed last year. The risk premium didn’t skyrocket. It wobbled a bit, but it was virtually nothing amid the grand scheme of things.” 

This is because foreign investors are giving South Africa the benefit of the doubt as they can see progress with the country’s reform process. 

“So now, it is up to us to deliver in terms of economic growth. That is what it comes down to.” 

“Yes, the global environment creates a very uncertain future and knocks South Africa around. But, if this government can maintain a low profile, the worst can be avoided.” 

Weimar did warn that global uncertainty will make the Reserve Bank cautious about future interest rate cuts as it would prefer to see how things play out. 

While there is space for a further 25 basis points interest rate cut, the next reduction is likely to be the last. 

South Africa is in a similar position to the rest of the world when it comes to inflation, as the future is largely dependent on which policies the Trump administration implements. 

Closer to home, Weimar said that goods inflation has come down as far as it can and will begin to tick up off a low base. 

The same applies to food inflation, which came down dramatically in 2024. However, it has come down so far that its next move will likely be up. 

“Now, fuel prices are starting to rise, with increases implemented over the past few months. This will effectively push headline inflation higher as it is a universal input.” 

“Thankfully, services inflation is likely to remain constrained. But that low inflation rate is going to start increasing again.”

Weimar said the Reserve Bank would be watching this closely, but because it is coming from such a low level, there is still space to absorb any shock. 

And so, there is likely to be one more cut in 2025, but no more as the Reserve Bank adopts a wait-and-see approach to what goes on in the US.