As good as it gets for the Rand
The South African rand has been one of the best-performing emerging-market (EM) currencies since the rebound in risky assets, gaining over 20% against the US dollar since late March 2020. This performance mostly reflects the rise in commodity prices and stronger appetite for EM assets. The rise in commodity prices has improved South Africa’s current account, while the country seems to be facing fewer immediate geopolitical risks than other EM countries and there are fewer concerns surrounding financial institutions. Fiscal risks in South Africa are more contained than in Brazil, another highly indebted country.
Looking forward, however, the rand may offer only limited further upside potential. The South African current account improved significantly from a deficit of 3% of GDP in 2019 to a surplus of 2.2% in 2020. But although much will depend on precious metal and iron ore prices, we would expect the country’s favourable current-account dynamics to fade in the coming quarters, notably because imports are set to pick up as domestic demand rebounds.
External conditions are unlikely to support the rand as much as they did in the second half of 2020, with rising global interest rates, putting upward pressure on the government’s cost of borrowing. Our in-house stance on EM equities and commodities suggest that the rand may not receive much support from either source. Longer term, low productivity growth and fiscal imbalances could remain headwinds for the rand, especially given the lack of structural reform.
Overall, we fail to see any sustainable drivers for medium- to long-term appreciation of the rand. Our projections for the USD/ZAR rate are ZAR14.5 on a three-month horizon, ZAR15.0 on a six-month horizon and ZAR15.5 on a 12-month horizon.