The South African rand has secured its position among the top five performing emerging market (EM) currencies in 2024, marking its best performance since 2016. Analysts at Credit Agricole SA and Ashmore Group Plc suggest this positive trend could continue into 2025.
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Despite a late-year dip that resulted in a 2% decline for 2024, a year in which few EM currencies thrived, the rand outperformed most of its peers. Trailing only the Malaysian ringgit, Hong Kong dollar, Thai baht, and Peruvian sol, the rand’s resilience underscores its relative strength among the 24 major developing-nation currencies tracked by Bloomberg.
Factors Driving the Rand’s Resilience
While the prevailing strength of the US dollar, fueled by robust economic growth, challenged EM currencies throughout 2024, the South African rand demonstrated notable resilience. This positive performance can be attributed to several key factors:
- Increased Investment Levels: A significant surge in fixed-investment projects, reaching 794 billion rand ($42 billion) in 2024 compared to 193 billion rand in 2023, signals growing confidence in the South African economy.
- Lower Inflation: South Africa’s inflation rate remained low throughout 2024, hovering around 2.9% in November – the lowest in over a decade and comfortably within the central bank’s target range. This stability allows for potential interest rate cuts.
- Structural Reforms: Ongoing progress in infrastructure and energy sectors, including public-private partnerships at major ports and improved performance by Eskom Holdings SOC Ltd., the national electricity provider, further bolster economic activity.
- Favorable Interest Rate Differential: The South African Reserve Bank’s cautious monetary policy maintains an attractive interest rate premium over the US dollar, encouraging carry trade strategies where investors borrow in dollars to invest in higher-yielding currencies.
Graph depicting the South African Rand exchange rate
Positive Outlook for 2025
Experts predict a promising outlook for the rand in 2025. Bloomberg calculations project a total return of 15% based on anticipated interest rates and exchange rate movements. Credit Agricole forecasts the rand to strengthen to 16.40 per dollar by year-end, implying a 13% appreciation from current levels and exceeding the median analyst forecast of 18.07.
Infrastructure and Tourism Boost Growth
Improvements in infrastructure and a resurgence in tourism are expected to further benefit the South African economy and its currency. Gustavo Medeiros, head of research at Ashmore, highlights the positive impact of logistic reforms and increased tourism inflows on growth and foreign exchange earnings.
Bond Market Inflows and Economic Expansion
South Africa’s bond market is experiencing a surge in foreign investment, reaching its highest level since 2019. This influx of capital reflects growing confidence in the country’s economic trajectory. The South African Reserve Bank reports that the economy is currently enjoying its longest upward cycle since 1999.
Conclusion
The South African rand’s strong performance in 2024, driven by robust economic fundamentals, positions it favorably for continued growth in 2025. Increased investment, low inflation, structural reforms, and a favorable interest rate differential all contribute to the rand’s appeal among investors. Experts anticipate further strengthening of the currency, supported by infrastructure improvements, tourism recovery, and strong bond market inflows. The South African economy’s sustained upward trajectory reinforces the rand’s position as a compelling investment opportunity in the emerging markets landscape.
