Bianca Botes | Director | Foreign Exchange & Treasury Expert | Citadel Global | mail me |
As economic and political dynamics shift in 2025, the South African (SA) rand risks indicate that we could be in for a bumpy ride. However, it might not be all downhill.
Looking at the major market forces at play, there are top pressures on the Rand in 2025 that will be decisive for the Rand’s performance in the coming year.
SA’s fiscal discipline
All eyes were on the budget, which was postponed to the 12th of March. While the date has changed, the focal points remain the same.
We will still look towards the government to present a financial plan or budget that supports growth. It also needs to address the much-needed structural reforms required to solve problems within the local economy.
As always, attention will also focus on the government wage bill, state-owned entity (SOE) spending and fiscal debt. Macroeconomic reforms in SA during the coming year will play a major role in influencing the strength of the Rand.
Volatility in the commodity markets
Commodity-linked emerging market currencies, such as the Brazilian real and South African Rand (ZAR), will remain volatile. They are susceptible to weakness amid fluctuating oil and metals demand and dollar dynamics. However, growing demand for commodities such as gold and coal could help cushion SA’s export earnings.
In addition, potentially diversifying trade partnerships may offer further support. Over the medium to long term, the Rand takes its cues from commodity markets. It benefits from positive terms of trade.
Geopolitical shocks and increased trade tensions
Trade tensions between South Africa and the United States (US), under the leadership of President Donald Trump, will undoubtedly continue to impact the Rand risks.
The suspension of aid from the US to SA, coupled with the risk of an early suspension or non-renewal of the African Growth and Opportunity Act (AGOA), could contribute to the volatility relating to rand risks. AGOA is a vital trade programme between the US and sub-Saharan Africa that is set to expire in September 2025. An antagonistic approach by the Trump administration towards the BRICS trade bloc may also lead to further weakening of the Rand in 2025.
The success of South Africa’s G20 presidency in 2025 hangs in the balance. The future relevance of the G20 is also at stake, as the US refuses to participate. Meanwhile, SA and the global south are trying to rally global leaders on pressing issues such as climate change, economic inequality and technological disruption. These are the gravest issues of our time. They need effective international cooperation to be addressed.
The future cohesion and effectiveness of the G20 as a forum for global economic governance are now of serious concern. In addition, several countries are likely to enter into trade talks with new potential trading partners in 2025. This could cause current supply chains to diverge even further.
Geopolitical shocks or aggressive trade policies from the US could trigger a retaliatory global trade war. This may also lead to renewed safe-haven demand from investors. They will likely move most of their money away from perceived ‘riskier’ emerging markets to ‘safer’ developed markets.
Fluctuating and unpredictable US tariffs on imports will continue to threaten global supply chains. These disruptions will have the greatest impacts on export-dependent economies such as SA. Sticky inflation, driven by factors such as a robust labour market in the US and higher energy prices, adds to the challenge. Higher prices brought on by trade wars and supply chain disruptions due to geopolitical conflict also pose a risk. This could create a stagflationary[1] global environment.
Interest rate interventions or non-interventions
While the US Federal Reserve (Fed) left interest rates unchanged in February, this delay tactic and Trump-era tariffs on fuel imports are likely to drive a short-term rally of the US dollar (USD). However, moderating US growth, combined with narrowing interest rate gaps and overvaluation pressures, will likely weaken the dollar towards the end of 2025.
The US Fed is still expected to cut rates once towards H2 of this year. In contrast, more aggressive cuts from the likes of the European Union (EU) and the United Kingdom (UK), who are under pressure to stimulate growth, may cause policy divergence.
Meanwhile, the South African Reserve Bank (SARB) cut the repo rate by 25 basis points (bps) for a third consecutive time at the end of January. This brought the benchmark rate to 7.5%, which was less than the 50-basis point cut expected by the market.
The SARB is expected to maintain its conservative approach. It will monitor inflation closely to assist in its decision-making process. We are also keeping a close eye on the potential change in the inflation target bracket.
Emerging market headwinds and tailwinds
When looking at headwinds, Emerging Market (EM) currencies – specifically Asian currencies such as the Chinese yuan and Indian rupee, will be under pressure from USD strength. The strength of the dollar will also put the rand risks under pressure. Typically, higher US interest rates keep the dollar stronger for longer. This reduces the appeal of ‘riskier’ assets such as emerging market assets.
On the other hand, there is the possibility of tailwinds. The Chinese yuan could stabilise in 2025 due to interventions by the People’s Bank of China (PBOC) and regional trade pivots. Stimulus measures aimed at offsetting the Chinese property slump may also support EM growth and Chinese yuan stability. This will benefit China’s trading partners.
The Rand is an important emerging market currency. Given South Africa’s strong trade relations with China, the better the Chinese economy performs, the more commodities they consume. As a result, commodity-driven currencies such as the rand will benefit.
What SA businesses can do to manage their risk
It is clear that the world order is changing. South Africa Rand risks and outlook will face new geopolitical and economic challenges as its relationship with the US becomes more tense. However, some supportive factors may offer a positive counterweight to these issues. These include the SARB’s inflation targeting and increased global demand for commodities produced in SA.
In light of all these factors, SA businesses need to adopt foreign exchange (forex) risk management strategies. These could include hedging tools such as forward contracts[2] and options to lock in rates amid USD/ZAR volatility.
Operational adjustments may also help. For example, businesses can diversify suppliers and currencies. They can also leverage nearshoring for supply chain resilience. This could help protect businesses from future shocks.
Finally, technology integrations, such as centralised treasury platforms for real-time exposure tracking and automated hedging, could become critical risk management tools for South African import-export businesses in 2025.
[1] Stagflation refers to the dual economic burden on importers of stagnant or shrinking economic growth, coupled with persistently high inflation.
[2] Forward contracts are hedging tools used to hedge against currency fluctuations, providing traders with certainty of outcome, while nearshoring is a change in operating strategy where businesses bring their manufacturing, supply chain or operations, and even the currencies they pay in, closer to their domestic market, to reduce costs.
