Analysts see strong rand under new government of national unity

Analysts have revised their forecasts for the rand to reflect the increased optimism about the newly formed government of national unity (GNU) and its potential to drive economic reforms in South Africa.

Absa, in a recent research note, suggested the rand could strengthen to R17/$ in 2025 if the positive sentiment about the GNU persists and global risk sentiment remains favourable.

The bank previously expected the rand to end 2024 at R18/$, but now sees it at R17.50/$ by year-end and potentially R17/$ by the first quarter of 2025 under sustained optimism.

We believe President [Cyril] Ramaphosa’s re-election and the formation of [the] GNU have done enough to reduce the size of SA’s country risk premium. Accordingly, we now expect the rand to end the month at R18/$ before recovering to R17.50/$ by year end," Absa fixed-income and currency strategists Mike Keenan and Siyasiya Nonkonela wrote in a research note on Tuesday.

"Although not our base case at this juncture, if the global backdrop becomes significantly more risk-seeking and/or investors and corporates become increasingly enthusiastic about the GNU administration, then a move towards R17/$ and SA 10-year yield of 10.50% should not be ruled out over the medium term."

UBS has also updated its forecast, predicting the rand to reach R17.80/$ by the end of 2024. This shift comes after UBS initially warned that uncertainty about a coalition government post-election could weaken the rand. The bank's revised outlook reflects the market's positive reaction to the formation of the GNU by the ANC, DA, IFP, PA, and GOOD.

"We think the [election] outcome is positive for the rand: current president Cyril Ramaphosa remaining in office should keep SA on a reform-orientated path, and the involvement of the pro-business DA could support speedier progress and further focus on combatting waste and corruption," said UBS analyst Tilmann Kolb.

"While the market may give the new multi-party coalition the benefit of the doubt in the near term, the outfit will have to demonstrate that it can address SA’s structural and fiscal challenges and maintain unity."

Annabel Bishop, an economist at Investec, noted that the rand might face challenges breaking below the R18/$ level as markets await clear signs of US interest rate cuts. Despite this, the positive formation of the GNU is seen as a stabilising factor for the rand.