For the first time since 2016, South Africa’s rand has positioned itself among the top five best-performing emerging-market currencies this year. Analysts from Credit Agricole SA and Ashmore Group Plc indicate that there may be further appreciation ahead.

A significant drop in December caused the rand to forfeit its year-to-date gains, leading to an estimated 2% decline in 2024, a year where only three emerging-market currencies showed positive movement.

Read: Rand poised for a rebound

This placement marks it fifth, following the Malaysian ringgit, Hong Kong dollar, Thai baht, and Peruvian sol out of 24 major developing-market currencies tracked by Bloomberg.

Emerging-market currencies have faced hurdles in 2024, with robust US economic growth favoring the dollar.

Nonetheless, the rand’s relative strength is bolstered by rising investment levels, decreased inflation, and structural reforms, as well as a cautious central bank that upholds a favorable interest-rate premium over the US dollar.

“The carry trade appeal in South Africa remains strong as inflation expectations are stable,” noted Sebastien Barbé, head of EM research and strategy at Credit Agricole, highlighting the strategy where investors borrow dollars to invest in currencies with higher yields.

Read: Dollar eyes best year in almost a decade

The rand is anticipated to deliver a total return of 15% for 2025, based on expected interest rates and foreign exchange movements, according to Bloomberg’s estimates.

Credit Agricole forecasts an exchange rate of 16.40 rand per dollar by the end of 2025, suggesting a possible gain of around 13% from its current level, a projection more optimistic than the median estimate of 18.07 from a Bloomberg analyst survey.

As of 10:11 a.m. in Johannesburg, the rand had risen by 0.5% to 18.7097 per dollar.

Credit Agricole reports that the values of fixed-investment projects in South Africa have surged to R794 billion in 2024, up from R193 billion in 2023.

This growth aligns with improvements in infrastructure and energy reforms, particularly through public-private partnerships at the country’s largest port. Additionally, the efforts of electricity provider Eskom Holdings SOC Ltd. to minimize service interruptions have contributed to economic expansion.

Annual inflation slightly rose to 2.9% in November but remains at its lowest level in over a decade, comfortably sitting within the central bank’s target range of 3% to 6%. Inflation expectations for the coming year have dipped to 4.6%, as reported by the Bureau for Economic Research, giving the South African Reserve Bank (Sarb) increased flexibility to lower interest rates.

The Sarb has already cut borrowing costs by 50 basis points since September, with market forecasts suggesting another cut could occur in early 2025.

Enhancements in infrastructure are expected to further benefit both the country and its currency, according to Gustavo Medeiros, deputy head of research at Ashmore. “Logistic improvements and a notable rebound in tourism inflows are generating real growth and foreign exchange advantages,” he stated.

Moreover, inflows into South Africa’s bond market are projected to reach their highest levels since 2019, according to data from JSE Ltd. Non-residents’ net purchases of local debt totaled 41.4 billion rand in the third quarter, a major increase from 13 billion rand in the previous quarter, as noted by the central bank, indicating that the economy is currently experiencing its longest growth cycle since 1999.

“South Africa is proving its ability to sustain strong fundamentals,” declared Credit Agricole’s Barbé. “The data indicates a solid groundwork for enduring growth into 2025.”

© 2024 Bloomberg

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