Over the past year, only two of the 16 key currencies monitored by Currencies Direct have proven to be more resilient against a resurgent US dollar than the South African rand. Between February 29, 2024 and February 24, 2025, the rand has strengthened by 4.6% against the world’s dominant currency, with only the Malaysian ringgit managing a better performance. In the process, South Africa’s currency has left the Euro, the British pound and all the currencies of the other BRICS nations floundering.
The US dollar’s bull run towards the end of 2024 was caused mainly by expectations of higher economic growth, following the Republican Party’s victory in the presidential election. US President Donald Trump has promised to follow a growth-enhancing macroeconomic policy approach, which is likely to include tax reductions and has already led to increased tariffs on imports, especially on neighbouring countries and China.
A stronger US economy may slow down the declining trend of inflation, which could limit the extent and regularity of further interest rate cuts by the Federal Reserve. Although the yield on 10-year US Treasury bonds has declined marginally from its recent high of almost 4.8%, it is more than 260 basis points higher than three years ago and, at a rate of 4.4% on February 24, remains attractive to fund managers around the globe.
US Treasury yields remain attractive
Prospects of US bond yields remaining at current levels, combined with the conflict in Ukraine and the Middle East, has caused fund managers to flock back to the US dollar. At the end of January, the US dollar index rose to above 108 for only the third time in more than three decades. As recently as September 2024, the so-called “Dixie” had dropped to 100 on the back of a fairly aggressive start to the rate-cutting cycle, but the election of Trump has, for now, put paid to prospects of dollar weakness.
It is no coincidence that the renewed strength of South Africa’s currency has occurred in the aftermath of last year’s parliamentary elections, which resulted in a historic shift to a coalition government. The upshot of enhanced domestic and international investor sentiment over South Africa’s post-election economic prospects is a belief that economic reforms aimed at fostering higher growth will gather pace, now that the DA is part of the national executive.
The DA boasts an impressive track record of sound public sector management at municipal and provincial level in the Western Cape. This expertise, combined with the declared intention of the Government of National Unity (GNU) to seek closer cooperation with the private sector in the repair, maintenance and expansion of the country’s infrastructure, has already prompted the World Bank to raise its 2025 GDP growth forecast for South Africa to 1.8%, from 1.3% previously.
Exports shine in 2024
Balance of payments stability lies at the heart of the remarkable resilience of the rand over the past twelve months. During 2024, South Africa recorded its eighth successive trade surplus, whilst the financial account of the balance of payments has been in surplus for eight successive quarters with an average net quarterly net inflow of almost R17 billion.
Fortunately, several manufacturing sectors continue to generate substantial foreign exchange earnings, with the sectors for vehicles, components and spares and food processing at the forefront.
The imminent removal from grey listing
National Treasury also deserves credit for the sustained efforts to meet the requirements for South Africa’s removal from the so-called grey list. The Financial Action Task Force (FATF), an international standard-setting body, added South Africa to this list three years ago, due to perceived gaps in domestic legislation aimed at compliance with anti-money laundering and counter financing of terrorism rules.
During February, National Treasury announced that South Africa is now deemed to have addressed 20 of the 22 action items in the action plan. This means that there are just two items to be resolved in the next reporting period that runs from March 2025 to June 2025. In order to remove the last two deficiencies, South Africa must demonstrate a sustained increase in investigations and prosecutions of serious and complex money laundering and a sustained increase in the effective identification, investigation, and prosecution of the full range of terrorism financing activities.
Further progress in this regard would enable South Africa to be considered for delisting from the FATF grey list in October 2025, which should provide another boost for the rand exchange rate.
Dr Roelof Botha is economic Advisor to the Optimum Investment Group.
BUSINESS REPORT