The South African rand, like many emerging market currencies, is particularly sensitive to global economic conditions and geopolitical developments. Photographer: Chris Ratcliffe/Bloomberg
Stian van Zyl
The South African rand, like many emerging market currencies, is particularly sensitive to global economic conditions and geopolitical developments.
As we look ahead to 2025, several key factors are poised to exert significant influence on the currency’s performance. Among these, global debt levels, potential recessions in major markets, and geopolitical tensions are at the forefront.
Global Economic Factors and the Rand
High global debt levels remain a critical concern, as they amplify vulnerabilities in both developed and emerging markets. As central banks worldwide grapple with inflationary pressures, the likelihood of tighter monetary policies could exacerbate debt servicing challenges. For South Africa, a country already contending with domestic economic issues, these global dynamics may lead to a weaker rand as investors seek safer assets.
Potential recessions in major markets, such as the US and Europe, add another layer of uncertainty. Should these economies experience a downturn, global trade could slow, negatively affecting commodity-exporting nations like South Africa. Given the rand’s status as a commodity-linked currency, diminished demand for South African exports could trigger depreciation.
Geopolitical tensions, particularly between the US and China, further complicate the outlook. Prolonged disputes over trade, technology, and global influence could disrupt supply chains and weaken investor confidence. For South Africa, these tensions may translate into reduced trade opportunities and increased volatility in the currency market.
Increased tariffs by a Trump presidency also poses a significant risk to the rand. Higher tariffs on South African and other countries exports to the US could weaken trade flows and investor sentiment, further pressuring the currency. Additionally, South Africa’s support for BRICS and its closer ties with China and Russia may strain relations with the US, leading to potential economic repercussions and heightened volatility for the rand.
Volatility in the Forex Market and the Role of the US Dollar
The forex market is expected to experience heightened volatility in 2025, driven by shifting global economic conditions and monetary policy adjustments. For South Africa, the strength of the US dollar remains a critical determinant of the rand’s performance. Historically, the dollar has served as a safe-haven currency during periods of global uncertainty, often at the expense of emerging market currencies.
The US Federal Reserve’s policy decisions, particularly regarding interest rates, will play a pivotal role in shaping forex market dynamics. Should the Fed maintain a hawkish stance to combat inflation, higher interest rates could attract capital flows into the US, further strengthening the dollar. This scenario poses significant risks for the rand, as it may face downward pressure from capital outflows and reduced investor appetite for riskier assets. Higher interest rates are likely to keep sustained pressure on the rand throughout 2025, extending the challenges faced by South Africa’s economy.
Moreover, a return of Donald Trump to the US presidency is expected to contribute to material market volatility. His administration’s unpredictability in trade and foreign policy could disrupt global markets, with emerging market currencies like the rand bearing the brunt of these fluctuations.
A good example is how market risk sentiment declined following US President Trump's reinforcement of his tariff policy credibility. For example, Trump announced a 25% tariff on Colombian imports—set to increase to 50% within a week—after Colombia refused two repatriation flights of deported migrants. In response, Colombia swiftly imposed retaliatory tariffs on US goods before ultimately conceding to all of Trump’s demands to resolve the dispute. The incident underscored Trump’s readiness to leverage tariffs as a tool for achieving foreign policy objectives, heightening market concerns regarding trade policy uncertainty moving forward.
Challenges and Opportunities for Emerging Market Currencies
These conditions necessitate a proactive approach to risk management. Currency depreciation risks and heightened volatility in forex trading could challenge profitability. However, informed market participants who closely monitor market developments and central bank communications may identify opportunities amidst the volatility.
Pro-active risk management is key in times like these. By employing hedging strategies, companies can mitigate risks and capitalize on currency fluctuations by locking in rates that is favourable from a business perspective. Mitigating currency risk to an acceptable level should always be the number one priority for any business.
In summary, the South African rand’s trajectory in 2025 will be shaped by a confluence of global and domestic factors.
While challenges such as rising global debt, potential recessions, and geopolitical tensions pose significant risks, they also create opportunities for companies who are prepared to adapt to a volatile forex market. Increased tariffs by a Trump presidency, geopolitical tension between South Africa and the US due to BRICS alignment, and sustained pressure from higher interest rates are additional factors to monitor closely. By staying informed and implementing robust risk management strategies, market participants can navigate these uncertainties and potentially benefit from the shifting economic landscape.
Stian van Zyl is a forex risk manager at Kuda FX.
BUSINESS REPORT