What to expect from the rand/N$ in 2024

Helena Wasserman - The rand had a tough ride in 2023, losing more than 9% of its value against the US dollar.

It was the fourth worst-performing major currency in the world – after Argentina (which is in economic crisis, with its new government slashing the value of its currency by more than 50%), Russia (which has been hit by international sanctions after it triggered a war) and Turkey (which has inflation of 60% and interest rates above 40%).

The rand is currently priced as if South Africa is a failed state – not for failings of its state, says Johann Els, group chief economist of Old Mutual.

The currency has been hit by negativity over load shedding, Transnet and other problems that are inhibiting growth.

But South Africa has stronger fiscal and governance structures in place than many other emerging markets, with a lower risk of wild swings in government spending to pacify the populace, says Els.



Trading

The rand's weakness has in part been because it is such a liquid currency.

It is one of the world's top 20 most traded currencies, and sees more trading action than the currencies of much bigger economies, including Brazil and Russia.

Because traders know that they can quickly move in and out of the rand, and there are no foreign exchange restrictions on foreigners holding the rand, the currency is a popular proxy for how the markets feel about emerging markets.

When traders get concerned about anything, they typically sell off riskier assets – like emerging market currencies. In these "risk off" situations, the rand gets hit first because it is so easy to dump.

But Nedbank chief economist Nicky Weimar says the rand – along with SA bonds – has also suffered a "structural break" this year, an abrupt and perhaps permanent weakening in its expected trajectory.

The shift is due to mounting evidence that South Africa's economy will grow at lower levels than its peers and that the local risks are higher than elsewhere.

At current levels, the rand is already discounting some of the big risks – including continuing power problems and election uncertainty, she believes. But the impact of the rail collapse and the port crisis – which hit the economy hard in the fourth quarter – may not be priced in.

"We think the rand is going to get comfortable at current levels, given the uncertainty in the South African landscape," says Weimar. The rand was trading at R18.48/US$ yesterday morning.



Outlook

US interest rate movements will be key to the rand.

Investors are used to South Africa offering much higher interest rates than the US, which made rand investments attractive in the past. But following aggressive US rate hikes, that differential shrank and interest offered on rand assets now looks less appealing.

In December, the US central bank gave the clearest signal yet that it is done with rate hikes and is now pencilling in at least three rate cuts in 2024.

This, along with expected weaker economic growth in the US, will make emerging markets and their currencies look more appealing by comparison, said Els. This will encourage "risk on" trades, and the rand should benefit.

South African assets, particularly shares, are looking cheap – and the local markets should get a fair share of the expected investment flow into emerging markets, Els says.

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, expects a volatile rand in the initial stages of 2024. The February Budget is expected to look "poor" and traders will remain cautious amid the South African elections.



Elections

Uncertainty over the elections – and whether the ANC will enter into a coalition with the EFF – will keep pressure on the rand.

An increased tendency for questionable policies ahead of the election could result in bouts of rand weakness, said Nolan Wapenaar, co-chief investment officer at Anchor Capital.

"We think that the election will keep the market on edge, while policy actions aimed at maintaining the political status quo will continue to damage the outlook for the domestic economy. The fiscal constraints will continue to bite and will likely become more challenging in the year ahead," he added.

The rand could also be hit by South Africa's relationship with Russia, which could intensify thanks to a new deal with Gazprombank, the Russian state-owned company, to revive the Mossel Bay refinery – along with a government to press ahead with procuring new nuclear energy, which could benefit Russia, warns Weimar.



Trump

South Africa's status as a proxy for emerging markets may also work in its favour once the tide turns away from safe havens like the US dollar, says Els.

But while Weimar agrees that the rand could strengthen in the second half of 2024 as some of the local risks may recede, she warns that the US elections in November could present a wild card.

If Donald Trump wins, the country is expected to pivot more to protectionism and isolationism – which will hit emerging markets.

Weimar says the current US government has been a source of stability in geopolitics, but it is uncertain what impact Trump would have on the Ukraine war.

Increased instability could disrupt commodity, fuel and food prices, with an impact on the global economy. A safe-haven currency like the dollar could benefit at the cost of the rand.



Rand value

"By the end of 2024, the rand should be somewhat stronger than it is currently," says Van Papendorp. "Its ascent won't follow a straight line, though, as the markets navigate a range of risks."

He estimates that the rand at between R18/US$ to R19/US$ is closer to fair value, which discounts the reality of low growth expectations in South Africa.

Weimar also doesn't believe the rand is currently dramatically undervalued. When accounting for South Africa's lack of international competitiveness, structural problems and inflation differentials, the currency may be 1% to 2% cheaper than it should be.

However, the rand is notorious for over (and under) shooting once it corrects, says Weimar. It may, therefore, quickly move to much stronger or weaker levels, and take some time to find its equilibrium.

But Els says the rand is currently underpriced judged on its fundamentals, particularly its purchasing power parity (which compares the prices of exactly the same goods in different currencies).

Once the election is out of the way, the rand could strengthen to between R17 and R18, Els believes.

Investec expects an average exchange rate of 17.75/US$ in 2024 – from R18.45 in 2023. It also expects a stronger average rate against the euro (R19.77 in 2024, from R19.94 in 2023) and the pound (R22.68 in 2024, from R22.94 in 2023). – Fin24