‘Election year risk could hit rand,’ says Standard Bank

Africa's biggest lender, Standard Bank, says the rand is likely to exhibit some level of risk going into an election year, but foresees a possible rebound against the dollar in the second half.

Analysts and economists have forecast the possibility of the ANC losing its majority at the polls, which must be held by August.

“In an election year, combined with the risk of fiscal slippage, the rand ought to reflect some level of risk premium ... especially in the first half of this year it's going to cause the rand to be on the back foot,” Standard Bank chief economist Goolam Ballim told journalists at a presentation of the bank's economy report for 2024 this week. He said this was likely to endure.

The rand performed poorly against major currencies in 2023, depreciating more than 7% against the dollar in that period. 

"[Last year] was a dismal year for the ZAR,” Danny Greeff, co-head of Africa at ETM Analytics, told Business Times.

“The ZAR's weakness had an idiosyncratic flavour to it, as years of public-sector maladministration, fiscal profligacy and an inability to unlock South Africa's growth potential due to restrictive economic policymaking finally caught up,” Greeff said.

But Standard Bank said it was possible the rand could rebound in the second half of the year if the elections produce a predictable policy paradigm, the country's reform agenda continues to show traction and the dollar weakens as the US Federal Reserve begins its rate-cutting path.

Global interest rates have been raised since 2022 to combat rising inflation, but Standard Bank data showed that rates had crested in some markets, with easing cycles likely to follow, starting in emerging economies.

Locally, Stats SA data in January showed that inflation has been on the decline, averaging 6% in 2023, down from 6.9% in 2022 and back within the central bank's target range of 3%-6%.

To combat inflation, the central bank raised the lending rate at 10 consecutive meetings after November 2021, before holding the current rate of 8.25% at its last four meetings.

But Standard Bank was hopeful that rate cuts could come soon, forecasting four interest rate cuts in 2024 to shave off one percentage point of the central bank's main lending rate by year-end.

The rand is undermined by a lower local interest rate but also draws direction from global economic changes.

“Rate cuts in the US will weaken the USD, and could trigger a correction from extremely overvalued levels. By virtue of this, they would be ZAR-supportive,” Greeff said.

The US is likely to cut interest rates by more than South Africa, Ballim said, and this could provide a “cushion for the rand, or at least appreciation potential for the rand”.

Standard Bank also took a positive view on the South African economy, forecasting GDP growth of 1.2% in 2024, up from a forecast 0.6% in 2023, with the country likely to have “some level of resilience this year”.

Over the last year, the South African economy endured its worst rolling power cuts on record and faced crumbling rail and port infrastructure.

But Standard Bank said it hoped the country's reform agenda would continue.

“It’s a bold statement, but we think we've turned the corner. We think that in 2024 we’re going to have reduced load-shedding,” Ballim said.

The bank's positivity regarding the reform of state-owned entities extended to the national logistics company Transnet.

“I think on those two scores [Eskom and Transnet] it's reason to feel that in the latter half of 2024 it will be at least two of the reasons to provide optimism,” Ballim said.