Weak Rand Drains Wallets; Structural Reforms Key to Relief

SOUTH AFRICANS FACE A CURRENCY OUTLOOK SHAPED BY STRUCTURAL REFORMS, NOT JUST MARKET SENTIMENT

For more than a decade, the rand’s persistent weakness has become almost self-evident to ordinary South Africans. Currency depreciation has touched everything from import prices to the cost of foreign travel, shaping household finances and business planning across the country. Yet the investment framework underpinning this assumption may be shifting in ways that could reshape the currency’s trajectory over the next decade.

Additional reference context is available at https://www.businessday.co.za/opinion/2026-08-21-johann-els-rethinking-the-future-of-the-rand/.

The case for reconsidering the rand’s long-term direction rests on a fundamental observation: exchange rates respond when a country’s underlying economic conditions improve. This principle applies equally to currencies as it does to companies and broader economies. Markets reward improving fundamentals, not static conditions. During the 2002-08 period, South Africa demonstrated this dynamic clearly. Stronger economic growth, improving fiscal discipline, declining government debt, sovereign ratings upgrades and rising investor confidence combined to produce significant rand appreciation. The global context has shifted since then, but the mechanism remains relevant.

Today, several of those same ingredients are beginning to reappear in South Africa’s economic landscape. The country’s growth outlook is gradually improving as structural reforms gain momentum. Private sector participation in electricity generation has fundamentally transformed the energy sector. Logistics reforms are advancing. Operation Vulindlela continues to remove critical bottlenecks that have constrained economic activity. Fiscal discipline has improved meaningfully, with the government running sustained primary budget surpluses and government debt appearing close to peaking as a share of GDP.

Ratings agencies have grown increasingly constructive about South Africa’s trajectory. Over time, the country can gradually return to investment-grade status, a development with significant implications for capital flows and currency stability. These improvements matter not because they guarantee currency strength, but because they alter the fundamental calculation that investors make when deciding where to allocate capital.

Beyond these domestic improvements, the global environment has also shifted in ways that could support the rand. The US dollar appears to have entered a multiyear weaker cycle after more than a decade of strength. Large fiscal and current account deficits, an exceptionally high debt burden and the enormous foreign capital that has flowed into US financial markets over the past decade are unlikely to provide the same support for the dollar going forward. A structurally weaker dollar has historically been supportive for commodity prices, emerging markets and commodity-producing countries such as South Africa. This shift should support South Africa’s terms of trade and external accounts, reducing one of the traditional sources of rand vulnerability.

The relative positioning of developed and emerging economies has also changed fundamentally. Twenty years ago, developed economies generally offered stronger growth, lower debt and lower risk than emerging markets. Now many developed economies struggle with weak productivity growth, ageing populations and debt levels that would once have been associated with emerging markets. Many emerging markets, by contrast, have strengthened their policy frameworks and public finances. Investors do not compare countries in isolation; they compare opportunities. South Africa does not need to become perfect. It simply needs to improve relative to the alternatives.

Inflation dynamics deserve particular attention. If inflation averages closer to 3% over time, South Africa’s inflation differential relative to its major trading partners should narrow. The rand should still depreciate gradually over the long run, but the pace of depreciation could be materially slower than what South Africans have become accustomed to over the past decade. Lower and more stable inflation should gradually reduce South Africa’s risk premium, lower long-term borrowing costs for the government and private sector, ease the government’s interest burden and support a more stable currency.

This does not mean the rand will stop being volatile. Quite the opposite. The rand will probably remain one of the world’s more volatile currencies. South Africa has one of the emerging world’s deepest and most liquid financial markets, with no exchange controls on foreign portfolio investment. Global investors frequently use the rand as a proxy for emerging market risk because it is easy to trade. During periods of global uncertainty, the rand will therefore continue to overshoot, often regardless of what is happening domestically.

Yet volatility should not be confused with long-term direction. Currencies fluctuate around their long-term equilibrium. The argument is not that the rand will never weaken. It almost certainly will. The argument is that South Africa’s long-term equilibrium exchange rate is gradually improving as the country’s structural fundamentals improve. Small, open emerging market economies will always be exposed to global shocks. But if South Africa continues to implement structural reforms, maintains fiscal discipline, gradually returns to investment grade, anchors inflation closer to 3% and benefits from a more supportive global environment, the next decade could look rather different from the last. The biggest open question is not whether the rand will fluctuate, but whether the reforms now underway will prove durable enough to change the way the world prices South Africa’s risk.