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Rand Strengthens on Election Optimism, Up 2-3%

Election optimism propels South Africa's rand, with UBS predicting a 2%-3% rise post-May 2024 elections amid coalition hopes.

By Athena Xu

5/15, 03:56 EDT

Key Takeaway

  • South Africa's rand strengthens ahead of May 2024 elections, buoyed by investor optimism for a market-friendly coalition, potentially lifting the currency by 2-3%.
  • Economic challenges persist with high unemployment and slow GDP growth; election outcomes could impact fiscal policy and Reserve Bank's inflation efforts.
  • Global investors show confidence in emerging markets, including South Africa, despite risks of populist post-election policies affecting the rand.

Election Optimism Boosts Rand

South Africa's rand has shown notable resilience and improvement as the country approaches its elections on May 29, 2024. The currency has achieved some of its best closing levels this year, fueled by investor confidence that the African National Congress (ANC) will form a market-friendly coalition. This optimism is supported by the latest Ipsos poll, which indicates a decline in support for the largest left-leaning party and increased backing for the Democratic Alliance, the official opposition. Strategists at UBS predict that a favorable coalition could push the rand 2% to 3% higher post-election. Additionally, the absence of power cuts for over a month has positively impacted the rand's performance, contributing to a bullish outlook for local assets, including a notable winning streak for Johannesburg stocks.

Economic and Political Landscape

Despite the rand's recent gains, South Africa's economy faces significant challenges, with a high unemployment rate of 32.9% and sluggish GDP growth averaging 0.8% since 2012. The ANC, led by President Cyril Ramaphosa, is encountering its most challenging election in 30 years, with polls suggesting it may fall short of the 50% vote needed to govern alone. This scenario raises the possibility of a coalition government, potentially with the Economic Freedom Fighters (EFF), a far-left party advocating for the nationalization of key industries. Analysts express concern that such a coalition could lead to looser fiscal policy and undermine the Reserve Bank's inflation control, potentially shifting South Africa closer to China's influence.

Investor Sentiment and Global Perspectives

Investors are taking a cautious yet optimistic stance ahead of the elections, buoyed by improvements in infrastructure and the easing of power outages. The rand's strength reflects a broader trend of investor confidence in emerging markets, despite global economic uncertainties. However, the potential for populist policies post-election poses a risk to the currency's performance. Globally, investor sentiment diverges significantly from US economic discontent, with a Bank of America survey indicating confidence in a soft economic landing, contrasting sharply with US voter disillusionment as reflected in recent polls.

Street Views

  • UBS Strategists (Bullish on South Africa's rand):

    "A market-friendly coalition could propel the rand another 2% to 3% higher in the weeks following the election results."