Loaded for Bear: Rand set for turbulent ride until elections — and their aftermath

22 Apr 2024

The rand/dollar exchange rate is influenced by a range of factors. But for the next few weeks, South Africa’s general elections on 29 May and the result that follows will be the main driver of the currency. It’s bound to be a turbulent ride and the economic stakes are sky high.

What will the rand be worth on 30 May? If you know the answer, you stand to make a lot of money.

That will be the day after the election, and will also be the day the Monetary Policy Committee (MPC) of the South African Reserve Bank makes its next decision on interest rates. That decision will in part be determined by what the rand does between now and then — and how the MPC thinks the currency will perform in the election’s aftermath.

The direction the rand takes between now and the election — and the days after — is uncertain.

Read more in Daily Maverick: Elections 2024

But one thing is certain: it is bound to be a turbulent ride, not least because of the political uncertainty around an election in which the economic stakes are sky high.

The rand’s sensitivity to the political scene was underscored two weeks ago when the currency sank after Bloomberg published a report about a new poll that showed a surge in support for former president Jacob Zuma’s uMkhonto Wesizwe (MK) party – largely at the expense of the ANC.

Read more in Daily Maverick: Rand plunges after poll shows surge in support for Zuma’s MK party

The rand had been fetching around 18.44/dlr before that, its best levels so far in 2024. Its subsequent losses were extended that same day after data showed that US inflation picked up pace in March, raising the prospect that US interest rates will remain high for longer.

But it was the political news that sent the rand into its initial tailspin, and it has since fallen to its lowest levels in 2024, hitting 19.29/dlr on Friday, 19 April. On Monday, 22 April it had regained a bit of lost ground but was still above 19/dlr.

The rand/dollar exchange rate is influenced by a range of factors.

A big one is interest rates, and the difference between South African rates and those of major advanced economies, notably the US Federal Reserve. At the start of this year, global markets were betting on six US rate cuts this year, providing the SA Reserve Bank with space to also start trimming while protecting the value of the rand.

But inflation has remained sticky in the US as economic growth has surprised on the upside, and the monetary policy outlook has since dimmed, with expectations now of no more than two US rate cuts later this year.

The rand also moves with other tides, and there are factors at play which should perhaps give it a lift.

One is the charts and its valuation. This correspondent’s admittedly amateurish reading of the charts suggests there are strong buy signals for the rand at these levels, suggesting it is undervalued.

So I sought another, more informed opinion.

“If you look at the rand purely on an inflation purchasing power parity model, the rand should be trading maybe around 17.50/dlr,” George Glynos, Head of Research for the ETM Group, told me.

Okay then, go rand!

But then Glynos pointed to things such as the dire state of South Africa’s public finances.

“Once you take the fiscal position into consideration, it wipes out a lot of that undervaluation and tells you that the rand needs to be trading at these sorts of levels in order to attract foreign capital,” Glynos said.

A rand adrift — and vulnerable

Daniel Silke, Director of Political Futures Consultancy, said that the rand would be floating adrift for the next few weeks ahead of the election, with no policies to anchor it firmly as the ship of state is rudderless.

“There is no domestic direction impacting the rand other than a sort of wait-and-see attitude until the election results. So there’s no policy support for the rand given the fact that there is complete government inertia, at least for the moment,” Silke told me.

“On the domestic front the rand is effectively neutralised and it’s simply being buffeted by the macro global factors,” he said.

That leaves the rand in the run-up to the election largely at the mercy of global economic and political winds — which will likely mean a period of high volatility — with the election’s outcome determining its levels for the next few months.

There is one domestic factor that should be supportive of the rand at the moment, and that has been the three weeks plus change of no rolling national power cuts even as autumn’s chill has set in.

But Silke noted that there is a lack of certainty regarding the longevity of this period of no national power outages amid suspicions that it is a “factor that is being manipulated for electoral purposes.”

This throws into sharp relief how political uncertainty is weighing on sentiment. Even a seemingly reliable supply of power is powerless to charge up the rand.

The political background is the overriding factor at the moment. With no government policy to set the tone, the outcome of the election is critical.

Coalitions

A populist coalition comprising the ANC, the EFF and the MK party would almost certainly oversee a swelling of the sovereign debt burden to unsustainable levels, capital would flee at an accelerated pace and foreign investors would regard South Africa as radioactive.

“If the ANC has to team up with the EFF or the MK — which I don’t expect that they will, but if they had to — the rand will comfortably trade north of 20,” Glynos said.

How far north is anyone’s guess but if you look in that direction beyond the Limpopo, you get an idea of how rank populism can ultimately render a currency worthless.

“If you have a more responsible coalition with more centrist parties, then you have a situation which is a lot more palatable to financial markets given that it finally seems to be dawning on this government that they are running out of money,” Glynos said.

In that scenario, the rand should trade comfortably south of 20.

This also means that polls will affect the currency in a way that has not been the case since the dawn of democracy in 1994. The big question in elections over the past 30 years has been the size of the ANC’s majority.

This time around, there is the very real prospect of coalitions, and the rand’s fate for the foreseeable future — and that of the economy — will be sealed by the governing alliance that emerges. This point was driven home by the market reaction a fortnight ago to the poll mentioned above, showing huge gains for Zuma’s party.

So it’s probably best to buckle up. The rand will likely have some swings — and perhaps wild ones — between now and the election.

When that political dust has settled, its overall level and course will be set. And that could be north or south of 20/dlr. DM

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A rand adrift — and vulnerable

Coalitions