South Africa’s Rand Gains Traction as a Leading Emerging Market Currency

After a hiatus since 2016, South Africa’s rand has made its way into the ranks of the top five emerging-market currencies this year. Analysts from Credit Agricole SA and Ashmore Group Plc are indicating that further appreciation could be forthcoming.

A significant decline in December saw the rand losing its gains for the year, leading to an estimated 2% drop for 2024, a year when only three emerging-market currencies recorded an increase.

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Read: Rand poised for a rebound

This places it fifth, following behind the Malaysian ringgit, Hong Kong dollar, Thai baht, and Peruvian sol among the 24 main developing-market currencies tracked by Bloomberg.

Emerging-market currencies have encountered difficulties in 2024, as strong economic growth in the US has lent strength to the dollar.

Nonetheless, the rand’s relatively strong performance is bolstered by heightened investment levels, decreasing inflation, and structural reforms, along with a prudent central bank that maintains a favorable interest-rate advantage over the US dollar.

“The appeal of South Africa’s carry trade remains solid due to well-anchored inflation and expectations,” noted Sebastien Barbé, head of EM research and strategy at Credit Agricole, referring to the strategy where investors borrow in dollars to invest in higher-yielding currencies.

Read: Dollar eyes best year in almost a decade

According to Bloomberg’s analysis, the rand is expected to deliver a total return of 15% in 2025, driven by predicted interest rates and exchange rate fluctuations.

Credit Agricole forecasts an exchange rate of 16.40 rand per dollar by the end of 2025, suggesting a potential increase of approximately 13% from its current value, a forecast that is more optimistic than the median projection of 18.07 from a survey of Bloomberg analysts.

As of 10:11 a.m. in Johannesburg, the rand rose by 0.5% to 18.7097 per dollar.

Credit Agricole reports that fixed-investment project values in South Africa have surged to R794 billion in 2024, up from R193 billion in the previous year.

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This surge coincides with improvements in infrastructure and energy reforms, particularly through public-private partnerships at the country’s largest port. Moreover, efforts by Eskom Holdings SOC Ltd. to minimize service interruptions have stimulated economic growth.

Annual inflation edged up to 2.9% in November but remains around its lowest level in over a decade, comfortably fitting within the central bank’s target range of 3% to 6%. Expectations for inflation over the coming year have dropped to 4.6%, as reported by the Bureau for Economic Research, allowing the South African Reserve Bank (Sarb) some leeway for interest rate cuts.

The Sarb has already reduced borrowing costs by 50 basis points since September, with market speculations suggesting another cut could occur in early 2025.

Enhancements in infrastructure are anticipated to yield further benefits for both the nation and its currency, according to Gustavo Medeiros, deputy head of research at Ashmore. “Logistic reforms and a significant recovery in tourism inflows are producing tangible growth and foreign exchange benefits,” he commented.

Furthermore, foreign investments into South Africa’s bond market are projected to reach their highest levels since 2019, according to data from JSE Ltd. Net purchases of local debt by non-residents hit 41.4 billion rand in the third quarter, an increase from 13 billion rand in the preceding three months, as noted by the central bank, highlighting that the economy is currently in its longest upward cycle since 1999.

“South Africa is showcasing its ability to uphold strong fundamentals,” stated Credit Agricole’s Barbé. “The data reflects a solid base for continued growth into 2025.”

© 2024 Bloomberg

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