Rand Faces Election-Year Volatility, Recovery Potentially in Sight – Standard Bank Analysis

As South Africa gears up for a potential political shake-up in the upcoming elections, forecasted to be held by August, the nation's currency is bracing for an onslaught of volatility. In a recent assessment, Africa's largest lender, Standard Bank, cautioned that the South African Rand (ZAR) is set to navigate treacherous waters amidst the electoral uncertainty and possible fiscal slippage, but the bank also highlighted the silver lining that could herald a recovery in the latter half of the year.

Gloom overshadowed the rand's performance against major currencies throughout 2023, with the local unit lamenting a 7% devaluation against the almighty dollar. Standard Bank's Chief Economist Goolam Ballim underscored to reporters that election years typically demand a higher risk premium, a factor likely to pressure the rand. This could be exacerbated by the ANC's possible loss of its majority, a notion fuelled by various analysts and economists amidst the prevailing political climate.

The ANC's long reign has faced increasing scrutiny due to years of alleged public-sector maladministration and economic policies that have throttled the country's growth potential. "[Last year] was a dismal year for the ZAR,” lamented Danny Greeff, co-head of Africa at ETM Analytics, during an interview with Business Times. He attributed the currency's tribulations partly to the cumulative impact of these longstanding issues.

Despite the grim backdrop, Standard Bank projects a potential rebound post-elections, pegged on the prospect of a predictable policy environment, a continuation of the country's reform agenda, and a forecasted weakening of the U.S. dollar as the U.S. Federal Reserve starts to slash interest rates. This optimistic outlook arises amidst the backdrop of global actions taken since 2022 to tamp down inflation rates, which have started to crest, suggesting an emerging easing cycle, particularly in developing economies.

Closer to home, January's data from Statistics South Africa painted a picture of easing inflationary pressures, with averages dropping to 6% in 2023 from the previous year's 6.9%. The reversal of inflation back within the South African Reserve Bank's target range is a positive sign after substantial interest rate hikes over recurring meetings since November 2021. As a result, a hopeful Standard Bank anticipates rate cuts, predicting a total reduction of 1% by the close of 2024.

Foreign exchange rates invariably hinge on a complex interplay of local and international economic dynamics. Greeff points out that potential rate cuts in the U.S. could weaken the dollar, offering a propitious climate for the rand to recalibrate and forge a path to recovery. Standard Bank further forecasts that these cuts would likely exceed any implemented by South Africa, forming a cushion for the local currency.

Beyond the immediate fluctuation risks, Standard Bank also took a bullish stance on the broader South African economic outlook, estimating a GDP growth acceleration to 1.2% in 2024, an upswing from the preceding year's 0.6%. Amid harrowing power cuts and deteriorating infrastructure experienced over the past year, Ballim championed a strikingly optimistic view of the nation's direction, buoyed by confidence in the reform agenda's continued traction, especially pertaining to state-owned enterprises like Eskom and Transnet.

As South Africa finds itself at a pivotal juncture, balancing on the cusp of a critical election, investors and citizens alike harness cautious hope that the year will unfold to strengthen the rand and reinforce the foundation of a resilient economy.