South Africa’s Rand Shows First Coalition Since Mandela Means Business

(Bloomberg Opinion) — No forecast last year offered any hint that the century’s diminishing rand would be among the few to retain most of its value against the US dollar, the currency titan in 2024. Then again, no one predicted that in May South Africa would elect its first ruling coalition since Nelson Mandela’s “government of national unity” ended apartheid 30 years ago. The ouster of the African National Congress as the parliamentary majority enables President Cyril Ramaphosa, a Mandela protege, to rescue the continent’s largest economy of 61 million people from a decade of economic, political and social desolation with pro-business reforms ushering in disinflation, lower interest rates and stronger growth.

The favorable exchange of rands for dollars for most of 2024 is the consequence of unprecedented demand for the debt securities of the “Rainbow Nation,” beginning in April, which signaled voters’ repudiation of the ANC and its failure to reverse the rising rate of violent crime, collapsing municipal sewage systems exacerbated by energy shortages and the rand’s 26% depreciation since 2017. South African bonds are the best performers since then among 18 emerging market countries, generating a total return of 14% in 2024, according to data compiled by Bloomberg. Even when the dollar reached its strongest level since November 2022 after Federal Reserve Chair Jerome Powell told reporters seven days before Christmas that the US central banks interest rate policy remains “meaningfully restrictive,” the rand keeps its halo.

The union of the ANC and Democratic Alliance Party in June “was necessary to steer South Africa away from the economically disastrous, racially polarized, populist future that would have resulted if the ANC joined up with former President Jacob Zuma’s MK Party or Julius Malema’s Economic Freedom Fighters,” political analyst Justice Molala wrote in a column for Bloomberg Opinion in June. “Faced with implosion, the country has perhaps once again defied the doomsayers and fashioned a centrist path ahead” and yet Molala is circumspect. Ramaphosa “needs to quicken his step or he’ll suffer another false dawn,” he wrote a couple of weeks ago.

Whatever doubts persist related to unremitting crime, corruption and insufficient infrastructure, South Africa’s gross domestic product has been upgraded eight times since March, to 0.8% growth in the fourth quarter, the most optimistic average forecast of 10 economists who contributed their research to Bloomberg for more than one year. They now say GDP will expand 1.6% by the end of 2025. The expectation for slower inflation is the most definitive measure of investor confidence that turned favorable with the ANC losing its parliamentary majority.

Bets on South Africa’s average cost of living over 12 months, calculated as the difference between the nominal bond yield and the inflation-protected bond yield, declined during the past six months to 0.49% from the actual consumer price index of 5.6% in February. The nation’sCPI fell to 2.9% in November, almost half the level at the start of this year. The so-called break-even rate for 12 months is the lowest since the figures began to be compiled in 2012, Bloomberg data show.

The rand’s unanticipated performance is notable because it occurs during a period when the dollar appreciated 7.4% in 2024 as measured by the Bloomberg Dollar Spot Index, which tracks the greenback relative to a basket of 10 leading currencies.  Japan’s yen weakened about 10%, the euro fell almost 5% and the Swiss franc depreciated some 6%.

It was in the three months after the presidential election in June that the rand really shined, rallying as much as 11%. During the 20 years prior to the election, the rand lost 66% of its value as the worst performer in the group of 16 most-traded currencies, according to data compiled by Bloomberg. Rising optimism on the rand is reflected in its implied volatility. The measure of how traders view South Africa’s economic outlook fell 1.7 points this year, the most among those 16 currencies, according to data compiled by Bloomberg.

The election changed everything for investors. The benchmark FTSE/JSE Africa All Shares Index of companies on the Johannesburg Stock Exchange gained 9.20% this year through Dec. 29, compared with 5.42% for the MSCI Emerging Markets Index. South Africa bonds lost 5.2% in the first quarter, making them the fifth-worst performers among 19 countries in the Bloomberg Emerging Market Local Currency Government Bond Index. The second-quarter rally is unmatched, with rand-based government securities gaining 12% when measured in dollars, beating the debt of 18 other developing nations as the benchmark index declined 0.2%. No country has come close to matching South Africa’s rebound since the index was created in 2008. The bonds of Sweden, the best-performing developed country, returned 3% during the same period.

Now that foreign exchange and debt markets show confidence in the business-friendly coalition government, economic growth likely  will accelerate to 2% in the months ahead and to more than 3% over the next 10 years from less than 1% during the past decade, according to Yvonne Mhango, the Johannesburg-based economist for Bloomberg Economics.

More From Bloomberg Opinion:

–With assistance from Shin Pei.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler, editor in chief emeritus of Bloomberg News, writes about markets.

More stories like this are available on bloomberg.com/opinion