South African Rand Undervaluation Grows as Coalition Government Fears Grow: Investec

Above: File image of President Cyril Ramaphose, who will likely announce an election date this month. Image © Government of South Africa.

The South African Rand is undervalued as investors fear the upcoming elections will result in a coalition government, according to a new analysis from Investec, the South African investment and commercial banking services provider.

"Negative for the rand, the political heat has increased substantially this year ahead of the national elections, as parties jockey for voter support, with polls showing widely differing results for parties as the months wear on," says Annabel Bishop, Chief Economist at Investec.

Other drivers are at play, too, with Bishop noting the Rand has struggled in 2024 alongside other emerging market currencies amidst the headwinds posed by fading expectations for U.S. Federal Reserve interest rate cuts, which implies the global cost of money won't fall as fast as previously expected.

This lowers global growth potential, which impacts growth-sensitive currencies such as the rand.

But, according to Investec, the Rand's undervaluation is increasingly reflective of domestic considerations.

Bishop explains the uncertainty ahead of South Africa's election is putting a damper on the domestic currency; "lack of political stability in South Africa has also had a negative effect, with ANC support continuing to fracture in polls, and a changing political landscape emerging, with uncertainties having a negative effect on markets."

The vote date is yet to be announced, but it must be conducted between 21st May 2024 and 19th August 2024, with President Ramaphose set to announce the date this month.

According to Investec, markets will be watching polling that consistently shows the ANC will see support drop below 50%, with some below 40%.

The country's third largest party - the EFF - garnered 10% of the national vote in the country’s 2019 elections but is likely to grow its vote share at the expense of the ANC.

Any coalition government that involves the EFF would require the government to adopt some of the EFF's manifesto promises, which include the expropriation of white-owned land and the nationalisation of mines and banks.

"While it is too early to rely on the election poll outcomes for any firm predictions of exact results (with the polls themselves differing in size and locations), a coalition government is the most likely outcome, which is seen to add to volatility," says Bishop.

Investec nevertheless sees the Rand strengthening over the duration of the year from current levels as it shakes its undervaluation amidst falling global interest rates.

The Pound to Rand exchange rate is forecast at 22.82 by mid-year by Investec, and 22.83 by year-end, from 23.95 at the time of writing.

The Euro to Rand exchange rate is forecast by Investec to be at 19.87 by mid-year and 20.00 by year-end, down from 20.48 at the time of writing.

The Dollar to Rand exchange rate is forecasted at 17.90 and 17.70 at the same points in time, from 19.11 at present.