Bumpy road ahead for the rand, experts warn

South Africa’s rand will be increasingly hard to predict this coming year, says financial services company PwC.

The group’s latest economic outlook report said that the currency’s volatility makes it tricky to predict the currency’s value over the short term.

PwC added that the rand in 2022 was the tenth-most volatile and 18th-most traded currency out of 180 currencies globally – fluctuating at the whims of various international and domestic factors. The group said that those factors will continue to have an impact in 2023.

“This volatility was especially evident at the start of December when uncertainty over the political fate of President Cyril Ramaphosa caused a flurry of trades in South African assets,” said PwC.

“The rand weakened from below R17/$ on November 30 to nearly R18/$ on December 1, with the currency’s one-week implied volatility at its highest in two years at the start of December.”

On Thursday (2 February), the South African currency fell back in early trade after surging the day before when the US Federal Reserve signalled it had turned a corner in the fight against inflation, reported Nasdaq.

The market-related publication added that the rand is among the worst-performing emerging market currencies this year, weighed down by a power crisis that has seen outages every day in 2023.

The graph below shows the ZAR/USF and volatility index between 2019 and the end of 2022:

At the start of 2022, PwC forecast the rand to average R15.28/$ during the year. The South African currency eventually averaged a weaker R16.37/$ during 2022, said the firm.

Unforeseen factors such as the global conflict between Russia and Ukraine, its knock-on effects and the global energy crisis all affected markets worldwide, with emerging markets being most adversely impacted.

In trying to predict what global factor would influence the rand’s valuation this year, PwC pointed to the latest Eurasia Group’s list of top ten risks for 2023.

According to the report, such risks include, amongst others, political divisions in the political hub of the US, Washington, ripple effects of decade highs of inflation that could stoke civil unrest, and the emergence of artificial intelligence that could erode social trust and disrupt markets.

Within the domestic context, PwC said that local policy developments, or the lack thereof, could be a key driver of rand movements – similar to what has been seen historically.

The plight of load shedding is stifling domestic GDP growth and making business harder to conduct in the country – holding the rand hostage.

According to Investec’s chief economist Annabel Bishop, January typically sees seasonal strength in the rand, but this year market players penalised the rand as investor confidence crumbled in the face of the load shedding crisis.

“The looming threat of stage 8 load shedding, and outages, including stage 6 so far, have eroded confidence in the domestic economic outlook, with no government solution in sight in the near term, pushing the rand weaker,” said the economist.