The rand is adrift in a sea of uncertainty

As 2024 unfolds, the heightened volatility in emerging markets poses a significant challenge in forecasting the trajectory of the rand's exchange rate.

Numerous events loom on the horizon, each capable of exerting substantial influence on the currency's value.

This year holds the promise of remarkable significance, with 60% of the global GDP slated for elections and various geopolitical, economic and military conflicts unfolding worldwide.

Additionally, a downturn in economic activity in China has precipitated a global commodity price slump.

From investors to CFOs of multinational corporations to local small and medium-sized enterprises, financial planners face unprecedented complexities in charting their future course.

Myriad events are shaping the near- and long-term prospects of the exchange rate. While many unforeseen events may yet arise, it is crucial to assess known potential catalysts through scenario planning to gauge their likely impact on the currency's exchange rate.

The most important “knowns” that will have an influence are:

The changing interest rate

After a surge in global inflation attributed to widespread government payments to populations and logistical supply chain bottlenecks, central banks worldwide implemented some of the most rapid interest rate hikes in an effort to curb inflationary pressures.

However, the situation appears to have stabilised, with inflation receding on a global scale.

For instance, in the US, the inflation rate dropped from 9.1% in June 2022 to 3% in June 2023, this shift has created conditions conducive to potential interest rate cuts.

These anticipated cuts are poised to reduce the cost of capital, stimulate risk appetite, and potentially bolster the value of an undervalued rand.

The US election

The outcome of the 2024 US election holds significant implications for exchange rates, given the country's status as the world's largest economy, contributing about 40% of the global GDP.

With Donald Trump emerging as the front-runner, his proposed approach to international diplomacy, stance on global trade and potential implementation of protectionist economic measures against Eastern nations are poised to introduce volatility.

Trump's rhetoric includes plans to impose a 40% tariff on all imports from China, a policy likely to garner support from US voters but with potential repercussions on US inflation.

Such inflationary pressures are anticipated to influence interest rates, thereby instigating fluctuations in currency exchange markets.

Geopolitical conflicts around the world

Amid a nearly two-year conflict on the edge of Europe, full-scale warfare between Israel and Hamas, and heightened tensions with China threatening a blockade of Taiwan, alongside various conflicts across Africa, foreign exchange markets have experienced unprecedented volatility and uncertainty.

Additionally, the economic tensions between China and the US have hampered international trade, prompting wealth managers to seek refuge in traditionally stable currencies like the US dollar and the Swiss franc.

This dynamic is likely to exert pressure on all emerging market currencies.

The SA election

In 2024, it's not just the US heading to the polls; SA is also poised for significant political change.

On May 29, there's a strong expectation that, for the first time since the advent of democracy, the ruling ANC will lose its majority, garnering less than 50% of the national vote.

This scenario would necessitate a coalition government, a historical rarity with uncertain outcomes.

The composition of this coalition, whether it leans towards an ANC/EFF or ANC/DA alliance, will profoundly affect the trajectory of the rand.

A potential coalition with a more extreme left-leaning and populist ANC/EFF could result in increased public spending, higher public debt and potentially elevated interest rates, albeit with diminished international investor appeal.

The prices of resources

SA plays a significant role as a major exporter of mined resources, constituting more than 30% of its total exports.

Fluctuations in international prices of these commodities strongly impact SA's trade balance. 

Given China's pivotal role as a major consumer of these resources, coupled with its own economic challenges including a declining property market and sluggish global economy, global prices of minerals and resources have plummeted to unprecedented lows.

As a resource-rich nation, SA is particularly vulnerable to declines in resource prices, which dampen demand for the rand. Consequently, an undervalued rand will be observed until there's a resurgence in mineral and resource prices.

From the aforementioned factors, it's evident there are numerous complexities influencing the future valuation of SA's currency.

This prevailing uncertainty and volatility pose significant challenges to businesses, particularly SMEs, wreaking havoc on their budgets and financial planning processes.

CFOs, accountants and business leaders often struggle to accurately quantify the foreign exchange risks inherent in their operations, from pricing goods to providing future quotes to clients.

SMEs, lacking the resources to employ skilled treasurers, find themselves unable to adequately mitigate these risks, while major commercial banks tend to focus on larger importers and exporters.

In light of these challenges, it is imperative for businesses with exposure to foreign exchange risks to establish robust risk-limiting hedging strategies, especially during the exceptionally volatile times anticipated in 2024.

Ensuring profitability and security while the rand is adrift in a stormy sea of uncertainty demands proactive planning and strategic foresight.

This article was sponsored by Merchant West Incompass.