A year ago the rand was close to R19 to the dollar, now it is hovering below R16. Many are claiming this is primarily due to the weaker dollar and normalisation in its valuation, and a global easing of inflation has caused interest rates to fall, affecting the dollar.
However, notable improvements in the South African economic climate are making the country a more attractive destination for investment. This includes a credit rating upgrade from Standard & Poor’s, getting clear of the financial greylist, and the removal from the EU’s list of high-risk third country jurisdictions.
Furthermore, the country’s monetary policy is pushing it towards a low inflation environment, with the South African Reserve Bank setting a 3% target. This is being coupled with a general outlook that has more space for a lower interest rate environment.
Fiscal policy and budget reforms are also making a difference. In an article in Business Day, National Treasury director-general Duncan Pieterse highlighted that for the first time since 2009 debt would stabilise as a percentage of GDP (“South Africa’s debt stabilisation marks a fiscal turning point”, January 26).
He indicates a core focus has been to achieve a primary surplus, and that it is his intention for the 2026 budget to show a third consecutive primary surplus and keep up this momentum. Keeping revenue up while keeping costs down.
The result is investors are buying South African bonds and driving more demand for the rand. Pieterse mentioned that in December the country listed its first infrastructure bond on the JSE. What he didn’t mention was that it was over-subscribed, indicating a strong sentiment towards investment in the country.
South Africa is on an almost perfect golden highway as the interplay between monetary and fiscal policy are coming together to balance and support each other.
A stronger rand makes imports cheaper, which is particularly useful as fuel and oil are priced in dollars. Fuel costs are a key driver of inflation, which means if fuel is cheaper to import petrol prices will fall, helping to keep the cost of products transported by road as low as possible.
South Africa is on an almost perfect golden highway as the interplay between monetary and fiscal policy are coming together to balance and support each other.
This feeds in perfectly with the Reserve Bank’s policy of trying to keep inflation at 3%. Households are protected, and you have more money in your pocket at month’s end. If the rand stays strong inflation eases more, giving the Reserve Bank more space to cut or hold interest rates. Again, if interest rates fall, the costs for individuals to access debt to grow their business or buy a house will decline.
As much of the public debt held by the government and state-owned enterprises is priced in dollars, it effectively becomes cheaper to pay off with a stronger rand.
Of course, a stronger rand does mean the country’s exports become more expensive offshore, which affects the trade balance. However, the boom in demand for commodities is almost counterbalancing this effect because gold and platinum prices continue to reach record highs. This plays directly into the country’s strength in the mining industry.
More to be leveraged
All of this presents a huge opportunity for the country, but there is more to be leveraged. A competitive energy market, improved operations at the ports and railways, with concessioning to bring in private investment, would help to drive the level of economic activity that could catapult growth.
A confluence of positive local and international economic conditions are working to South Africa’s benefit: a weakened dollar, investors wanting to take their money to emerging markets and South Africa making a series of positive fiscal and monetary reforms just as they are looking for better markets. All while commodity prices are surging. This presents incredible potential for the future.
• Griffiths is private secretary and adviser to deputy finance minister Ashor Sarupen.
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