Investec, a prominent financial institution, has issued a cautionary prediction regarding the South African rand’s potential depreciation against the US dollar. According to their forecast, the rand could plummet to R21.40 by the culmination of 2024, with a further decline to R21.90 anticipated by the close of 2025.
Investec’s chief economist, Annabel Bishop, highlighted historical trends wherein emerging market currencies, including the rand, typically bolstered during US interest rate reduction cycles. However, contrary to expectations fueled by projections of a rate-cut cycle in the US, persistent delays have contributed to the weakening of the domestic currency.
Recent fluctuations in the rand-dollar exchange rate have reflected this uncertainty. Last week, the rand hovered around R19.00 against the dollar amidst market skepticism regarding the commencement of US interest rate cuts in the fourth quarter of 2024.
Bishop underscored the potential impact of geopolitical tensions, particularly in the Middle East, on constraining economic growth. Escalations in the region could escalate oil prices and inflation, prompting tighter monetary policies from central banks and exacerbating risks of minimal relief within the current year.
Domestically, apprehensions loom large ahead of the May 29th elections, contributing to elevated risk aversion among investors. While some attributed last week’s rand weakness to these concerns, economists argue that they constituted only a minor factor.
Investec’s projections encompass a spectrum of scenarios, ranging from an optimistic “up case” to a dire “severe down case” for the rand’s performance in 2024. In the best-case scenario, the rand is envisaged to average at R16.99 against the dollar for the year, contingent upon robust economic growth, good governance, and favorable policy reforms.
Conversely, the severe down case paints a bleak picture, with the rand potentially averaging at R20.40 against the dollar. This scenario envisions a protracted global recession, exacerbated by factors such as high inflation, adverse weather conditions, and domestic challenges like severe load-shedding and civil unrest.
Investec’s base case scenario, representing the most likely outcome, anticipates the rand to be valued at R18.17 against the dollar in 2024. This prognosis is underpinned by expectations of modest economic growth supported by domestic policy measures, albeit hindered by persistent challenges such as load-shedding and logistical constraints.
The forecast further incorporates varying probabilities associated with each scenario, with the base case scenario assigned the highest likelihood at 45%. Other scenarios, including the lite (domestic) down case and the extreme up case, cater to potential fluctuations in economic conditions and policy outcomes.
Investec’s forecasts for the rand-dollar exchange rate in 2024 provide a nuanced perspective on the currency’s trajectory, acknowledging the interplay of domestic and international factors in shaping its performance. As South Africa navigates through a landscape marked by uncertainty and volatility, stakeholders are urged to remain vigilant and adaptable to mitigate potential risks to the economy and financial markets.
