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It lost 9% to the US dollar in 2023, and 17% over the past two years. Much of that was due to load shedding, which should ease as we approach elections. From Moneyweb.

A Reuters poll suggests more than half emerging market currencies are likely to gain against the dollar in 2024. Image: Mike Hutchings/Reuters

History has shown that it is never a good idea to be bullish on the rand, but could 2024 prove to be one of the rare occasions when the local currency smokes the US dollar?

The rand weakened against the US dollar in seven of the last 10 years. The last three years were a rout, with the rand losing nearly 30% against the US dollar as Covid, load shedding, grey-listing by the Financial Action Task Force and issues at Transnet brutalised the local currency.

Why should 2024 be any different?

Theoretically, it shouldn’t. A Reuters poll in December suggests more than half emerging market currencies are likely to gain against the dollar in 2024, though the Turkish lira and South African rand are not expected to recover their losses any time soon.

There are plenty of reasons to bet against the rand – among them, continuing load shedding, bottlenecks at Transnet, and what is likely to be the most tightly contested election – but expectations of a weaker US dollar point towards a better outlook for emerging market currencies.

Read: Kganyago sees 2024 elections among top risks for South Africa

With interest rates in the US likely to trend lower, emerging market currencies will benefit from the carry trade – where investors borrow in low interest rate countries to invest in high interest rate countries (like SA).

The MSCI International Emerging Market Currency index is up 4% since October in anticipation of this turn in the interest rate cycle.

The following chart from Bloomberg shows the rand against other emerging market currencies in 2023, and it is not a happy picture. Of 22 emerging market currencies, the rand came fourth last.

“Load shedding remains a bind on growth and investor sentiment, as does Transnet’s enormous, and worsening logistical problems over 2023, which has also negatively affected state revenues and so foreign investor sentiment into markets,” explained Investec chief economist Annabel Bishop in a note to clients.

How emerging market currencies performed in 2023

Source: Bloomberg

There are signs that the problems at Eskom and Transnet are somewhat improved.

President Cyril Ramaphosa last year told Transnet that he expected to see some improvements at Transnet by early 2024, and last week we learned that backlogs at the Durban container port had reduced from around 20 ships at anchor in December to just five in early January 2024. So there’s that.

Read: Durban container port making headway in clearing backlog of vessels

The end of load shedding is still five years away, according to Eskom, and the ruling party knows it is going to be judged harshly by voters in the upcoming national elections, now a few months away.

Much of the bad news, and there’s been plenty of that, is priced into the rand.

The chokehold that Eskom and Transnet exert over the economy cannot be fixed in a few months. That will take years, perhaps decades. And that means the economy can expect dismal growth rates of perhaps 0.7% to 1.5% a year for the next two years, according to Stanlib.

Predictions

So where does this leave the rand in 2024?

At R18.21 to the USD according to Nedbank, slightly better than its current rate. Investec sees it at R17.60 in the final quarter of 2024, after averaging R18.80 for much of last year.

Last year Goldman Sachs predicted that the rand would strengthen to R14 to the dollar by 2026, and expected the rand to reach R17.50/USD by the middle of 2024. Chief economist at The Efficient Group, Dawie Roodt, has consistently argued that the rand should be valued closer to R15-R16 to the US dollar based on its purchasing power parity (PPP) value.

There are some potential upsets to this bullish outlook for the rand.

Goldman Sachs argues the US dollar may remain stronger for longer because of better-than-expected US economic growth of 2.1% in 2024, coming on top of a 2.4% growth in 2023 – much higher than the 0.4% consensus for the US at the start of 2023. Should this turn out to be the case, this will dampen demand for emerging market currencies.

The rand could see some whipsawing in the months leading up to the elections, perhaps revisiting the R19/USD level seen in 2023.

On the more positive side, as noted by BeztForex in a newsletter to clients, SA’s improving current account deficit in the third quarter of 2023 – benefitting from a weaker rand – was a piece of good news in an otherwise dreary year for the local currency.