South Africa’s rand has emerged as one of the best-performing emerging-market currencies of 2024, marking a significant milestone for the first time since 2016. Despite a late-year setback, analysts predict further gains for the currency, supported by strong economic fundamentals and strategic interventions by the South African Reserve Bank (SARB).
Following a sharp decline in December that erased earlier gains, the rand ended the year with a 2% loss. However, it still stands as the fifth-best-performing currency among 24 major developing-nation currencies, trailing behind the Malaysian ringgit, Hong Kong dollar, Thai baht, and Peruvian sol. This is a notable achievement, considering that only three emerging-market currencies managed to make any progress in 2024.
While a strong U.S. dollar, fueled by robust economic growth in the United States, has posed challenges for many emerging-market currencies, the rand has shown resilience. Experts attribute this performance to several factors, including increased foreign investment, lower inflation, and ongoing structural reforms in South Africa. Furthermore, the SARB has kept interest rates at attractive levels, maintaining a premium over the dollar, which continues to drive demand for the rand.
Sebastien Barbé, head of emerging-market research and strategy at Credit Agricole, highlighted the currency’s “carry appeal” as a key factor behind its performance. This strategy involves borrowing in low-yielding currencies like the U.S. dollar to invest in higher-yielding ones like the rand. Based on interest rates and exchange-rate predictions, analysts are projecting a 15% return for the rand in 2025.
Looking ahead, Credit Agricole forecasts the rand will strengthen to 16.40 per dollar by the end of 2025, representing a 13% gain from its current level. This is a more optimistic outlook compared to the median forecast of 18.07 per dollar. As of the latest market data, the rand had strengthened by 0.5% to 18.7097 per dollar.
One of the driving forces behind the rand’s strength is South Africa’s economic recovery. The country has seen a significant increase in fixed-investment projects, with investment levels rising to 794 billion rand ($42 billion) in 2024, up from 193 billion rand in the previous year. These investments are largely driven by infrastructure and energy reforms, including public-private partnerships at South Africa’s largest port. Additionally, Eskom Holdings SOC Ltd., the state-owned electricity supplier, has made strides in reducing power outages, further supporting economic activity.
South Africa’s inflation remains subdued, with annual inflation rising slightly to 2.9% in November, but still well within the SARB’s target range of 3% to 6%. Inflation expectations for the next year have fallen to 4.6%, giving the SARB room to lower interest rates further. Since September, the central bank has already reduced borrowing costs by 50 basis points, with markets anticipating another rate cut in early 2025.
Infrastructure improvements, along with a recovery in tourism, are expected to provide additional support to the rand and the South African economy. Analysts from Ashmore Group Plc believe that logistic reforms and increased foreign-exchange benefits from the tourism sector will continue to drive growth.
Furthermore, South Africa’s bond market is experiencing a surge in foreign inflows, with non-residents’ net purchases of local debt reaching 41.4 billion rand in the third quarter of 2024, the highest level since 2019. This is indicative of the country’s longest economic expansion since 1999, according to the central bank.
“South Africa is demonstrating its ability to deliver on the fundamentals,” said Sebastien Barbé of Credit Agricole. “The economic data reflects a solid foundation for continued momentum into 2025.”
As the rand continues to show strength, South Africa’s economic outlook remains positive, positioning the currency for further growth in the coming year.