Strong rand not reflection of SA’s economic health

While it seems that the South African economy is getting knocked from all over, the rand just keeps soldiering on. However, an economist warns that the strong rand must not be regarded as a reflection of the country’s economic health.

Why is the rand performing so well despite global uncertainty? Shannon Bold, senior economist for macro-econometric modelling and forecasting at the Bureau for Economic Research (BER), says the strength of the rand is part of a global trend.

“Since the start of the year, many currencies, including most emerging market (EM) currencies, have been doing better against the US dollar. Much of this can be attributed to what is known as a “weak dollar story.”

“Global investors have been adjusting their expectations around US monetary policy amid heightened uncertainty about the strength of the US economy, which has caused the dollar to soften.”

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Rand not necessarily reflection of SA’s economic health

While the rand’s strength is not necessarily a reflection of South Africa’s economic health, the country’s risk premium has been climbing steadily since mid-December, and recent surges in 10-year bond yields signal that investors remain cautious, Bold points out.

“South Africa’s CDS spread, a measure of sovereign default risk, also increased over this period, although it remains below pre-government of national unity (GNU) highs. The rand’s strength is driven more by global market dynamics than by any strong local economic fundamentals.”

However, she says, on the domestic front, the somewhat better-than-expected current account deficit in the fourth quarter, as well as South Africa’s monetary policy stance, could be offering some support to the rand.

“With a relatively high real interest rate, the rand remains an attractive currency for yield-seeking investors. In addition, the South African Reserve Bank (Sarb) is expected to cut rates by less than the US Federal Reserve, which could give the rand some short-term tailwinds.

“However, looking ahead, we anticipate that the rand may revert to a depreciating trend by 2026, driven by inflation, interest rate differentials and external account pressures.”

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SA and rand historically benefitted from global crises that drove up commodity prices

Bold explains that South Africa historically benefitted from certain global crises, particularly those that drive up commodity prices. “During periods of global uncertainty, investors flock to gold as a safe-haven asset, which in turn boosts South Africa’s mining sector. This creates a positive feedback loop, increasing export revenues and generating higher tax receipts.”

While South Africa’s share of mining production declined over the past few decades to just below 14% (using 2019 production weights as per Statistics SA) gold plays a role in the country’s economic resilience, she says.

Bold says the same is true for sustained, high prices for any of South Africa’s export commodities regarding:

• An economic buffer: High gold prices can help offset domestic challenges, such as political instability, budget shortfalls, or rising inflation. When prices are elevated, the revenue from gold exports acts as a cushion against these pressures.
• An increase in investment and sentiment: A strong gold sector improves foreign investor confidence in the local economy, attracting capital and supporting overall economic growth. In recent weeks, South Africa’s biggest gold miner, Harmony Gold, announced R3 billion of investment in underground mines and surface gold.

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Gold and commodities bring only short-term gains such as strong rand

However, Bold points out that while gold and commodities can bring short-term gains, long-term global instability (political or economic) is never ideal, as prolonged instability can erode trade, foreign investment and capital flows, which are critical for sustained growth.

She says South Africa’s economy remains in a delicate balance. “While global shifts, such as the performance of the rand, gold prices and geopolitical dynamics, can bring short-term gains (or sometimes pain), they also underscore the importance of sound policy and long-term growth strategies.

“Structural reforms, diversification of trade partners and strategic investments in sectors beyond gold will be essential for ensuring that South Africa can weather future storms and build resilience in a rapidly changing global landscape.”