South African Rand's Recovery Can Extend: Investec

Above: File image of Enoch Godongwana, copyright Pound Sterling Live, Still Source: SABC News.

One of South Africa's biggest investment banks thinks the Rand will recover further.

Investec says the rand has recovered as previous severe tensions in the Government of National Unity have subsided, and its forecast points show further gains are possible in the coming weeks, particularly against the Euro and Pound.

"The rand will also remain volatile, highly sensitive to movements in global financial markets and local politics, although the latter is expected to have stabilised to a substantial degree now, with an improved working relationship in the GNU," says Annabel Bishop, an economist at Investec in Johannesburg.

The Rand weakened notably in the first half of April on a combination of global factors (U.S. tariff announcements) and domestic uncertainties relating to the sustainability of the governing coalition following a dispute over tax rises in the budget.

The Democratic Alliance (DA), the second-largest party in the GNU, opposed a VAT hike proposed by the African National Congress (ANC), the biggest party in the coalition.

The DA voted against the budget but also initiated legal action, claiming procedural irregularities. ​

Facing mounting political pressure and a legal challenge, Finance Minister Godongwana announced on April 24 that the VAT increase would be scrapped, keeping the rate at 15%. This decision was further reinforced by the Western Cape High Court, which suspended the VAT hike pending proper legislative procedures.

"With no VAT increases now, South Africa will see a third revision to the budget, which is expected to see some expenditure cuts, given the difficulty in pushing through higher taxation, with the economy already weak, and a risk of slower growth," says Bishop.

She explains that a revised budget is still awaited, "the two main political parties in the GNU are expected to work closer together."

Additional tailwinds will come from further easing in global tariff tensions now that U.S. President Donald Trump has signalled a softening in stance against China, owing to fears that the U.S. economy is expected to suffer a significant slowdown owing to existing tariffs.

This would help buoy Emerging Market assets such as the Rand.

For the Pound-to-Rand exchange rate, the forecast of 23.62 for mid-year is lower than the 24.84 level seen in spot at the time of writing.

The Euro-to-Rand forecast for mid-year is 19.90, down from 21.12 at the time of writing.

However, the Dollar-to-Rand is seen at 18.60 by mid-year, which is largely in line with current levels in the exchange rate, but represents a 7.0% recovery by the Rand since the April 11 peak of 19.92 in USD/ZAR which represents a joint all-time high.