By Harry Scherzer
Over the past decade or so, South Africans have had little to celebrate when it comes to the exchange rate between the rand and other major currencies (unless they happen to earn in those currencies). Between 2012 and 2022, for example, the local currency lost more than 50% of its value against the US dollar. The picture has been similarly bleak when it comes to the rand’s performance against the British pound and the Euro.
While some of the losses have been down to external causes outside South Africa’s control, most have been own goals. The failure to adequately address load shedding since 2007, the corruption that flourished during the Zuma years, and the inability to meaningfully grow the economy have all played roles in the rand’s decline.
But what can we expect in 2024? Will there be further declines or are there enough economic tailwinds to suggest that the rand could rally?
The international picture
Before looking at some of the local factors that could influence the rand’s performance in 2024, it’s worth considering some of the international factors that could play a role. It’s also worth remembering how quickly things can change within that context.
Take interest rates, for example. Towards the end of 2023, many analysts felt that the fact that the US had managed to bring inflation under control and avoid a recession, despite some of the most aggressive interest rate increases in history, meant that interest rates would soon be cut. The expectations have had to be tempered, with the first cuts expected to come only around mid-year.
The expectations may be further tempered by the war in Ukraine and the escalating conflicts in the Middle East, which continue to impact supply chains. As a result, investors could hold on to the relative stability of treasury bonds, bolstering dollar strength.
Another potentially big factor when it comes to currency performance in 2024 is elections. While South Africans will go to the polls later this year, so will many other countries, including major economies such as the US, UK and India. The outcomes of the foreign elections could play a significant role in whether money flows into or out of emerging markets, something which has knock-on effects for the rand.
Local headwinds and tailwinds
Closer to home, the uncertainty surrounding the country’s most important elections since 1994 means that investors will likely remain cautious. That lack of investor confidence will have an impact on the rand, as will the crises at Eskom and Transnet.
Fortunately, there does at least appear to be some movement on the former. Rooftop solar PV, for example, appears to be helping ensure that daytime load shedding is less severe than it has been for some time.
The small Free State town of Clarens, meanwhile, recently became the first South African town where residents are equipped to manage their own electricity through load curtailment. If the pilot proves successful and the concept can be rolled out more widely, then it may help ensure businesses across the country can continue operating at full steam.
Inflation is also slowing, meaning that the Reserve Bank may be able to cut interest rates (most likely shortly after the US does), boosting consumer confidence and giving the economy a shot in the arm. Lower interest rates would also allow investors to take bigger risks, further boosting the economy.
Navigating uncertainty with the right partners
As the past few years have demonstrated, however, all of this could change quickly. Businesses and individuals with currency exchange needs therefore need to seek out certainty wherever they can.
The best way of doing so is to use a foreign exchange provider that places a premium on customer service, particularly one that provides dedicated account managers who have deep expertise in the currency exchange space. They also need to ensure that their currency exchange provider is transparent in its pricing, as this practically guarantees that they’ll pay less on every transaction than they would if they went through their bank.
Last, the right payment provider should also offer a measure of risk management and hedging, which is typically in the form of Forward Exchange Cover (FEC) that locks in today’s exchange rate for delivery on a future date. Not only does this facilitate smoother financial planning, but it provides a level of safeguarding against unpredictable rand movements.
Scherzer is the CEO Future Forex.