Bottom Line:

The next three months could be a volatile time for global financial markets and the ZAR given the risk events and factors discussed. While at current levels the ZAR is very undervalued, history has shown that it can weaken further given the right market conditions. These include another notable stock market sell-off or any other risk event at a time when financial market volatility is high. As the Federal Reserve and other major central banks look to tighten monetary policy by raising interest rates, emerging market currencies such as the ZAR will be pressured and may be prone to more bouts of weakness.

Baseline View:

While the next few months may be a volatile time and could lead to some further ZAR weakness, the currency’s current undervaluation has proven historically to be difficult to maintain for a significant period of time. Our longer-term view is, therefore, that we expect a correction from current levels. The current bout of weakness being experienced is more a dollar story than anything else, and once the support on offer to the dollar by the Fed begins to unwind, a strong correction lower will follow.

Risk Factor Analysis Probability of ZAR influence in 6 – 9 months
Tighter Global Monetary Policy
  • While global growth concerns are still present, it is clear that major central banks, including the Federal Reserve, are committed to tightening monetary policy aggressively. We may be near the back end of the cycle now, but even higher rates and tighter conditions are still coming.
  • Inflation pressures remain high despite recent signs to suggest that may be starting to ease. Several major economies have experienced the fastest pace of price gains for decades with forecasts suggesting that the retreat back towards target levels will be slower than first expected. This has tightened financial conditions at a significant pace and generated notable volatility within financial markets that were accustomed to years of loose policy and cheap money.
  • These tighter global financial conditions come with capital flow reversals from emerging market economies, widening spreads, and currency depreciation. These effects are more pronounced in economies that have greater external debt levels and higher financing needs. Given South Africa’s poor fiscal rectitude, this has already manifested in a weaker ZAR, especially once the tailwind from higher commodity prices faded.



Global central bank tightening is likely to persist over the near term, keeping market volatility high, which will have negative consequences for high-beta currencies such as the ZAR. Higher interest rates also threaten to send major economies into a recession, which poses a further risk to emerging market currencies such as the ZAR.

Inflation and cost-of-living crisis
  • The globe is currently experiencing an inflation and cost-of-living crisis. The pandemic that started in 2020 sowed the seeds for what we are seeing now, with the policy responses enacted culminating now in massive supply and demand imbalances that have driven up inflation and seen the cost-of-living soar for most of the globe. The war in Ukraine has only exacerbated this, with energy and staple food prices soaring as a result of reductions in supply.
  • The economic consequences of this crisis cannot be understated, with inflation in many developed-market economies reaching highs not seen in generations. The impact of this on economic growth is two-fold, through reduced spending as prices increase, and through tighter financial conditions as central banks increase interest rates to try and rein in these price pressures. To bring down inflation that is at current levels, economies must be driven into contraction. This creates a global environment of risk aversion in financial markets, which have already experienced and seen the impacts.



South Africa has been somewhat spared from the cost-of-living crisis when compared to the likes of the UK or other European countries. However, inflation has been rising and monetary policy has been tightened to try and combat it. For an economy with record unemployment and inequality, the social and political ramifications of this could be substantial.

Global Recession
  • The war in Ukraine and its impact on commodity prices, coupled with central banks tightening monetary policy at the fastest pace in decades, suggests that the fragile global economic recovery from COVID is facing some severe headwinds. Financial market signals such as yield curves and research models from major firms and institutions across the globe are all starting to scream high recession risk. Growth forecasts for this year and next are thus being revised notably lower, with the OECD the most recent major institution to do this. The OECD predicts that the global economy will only grow by 2.2% next year, with risks to this skewed towards the downside.
  • Financial markets have started to price this in, with equities having come under severe pressure this year and other growth-sensitive asset classes weakening. However, the risk is that a shallower slowdown has been priced in, but a deep recession has not. If growth slows more than expected over the coming months, a deeper drawdown is still possible.



Global central banks appear to be willing to tolerate a greater slowdown in economic growth than many had expected in their efforts to rein in inflation. A global recession as a result of this might induce financial market volatility, but it would also scale back the incentive for DM central banks to persist with higher interest rates and tighter monetary policy. As the USD currently has so much hiking already priced into it would be left vulnerable in such an instance, something the ZAR might capitalise on.

USD Shock
  • The US dollar has surged to new record highs in 2022 when looking at the trade-weighted index of the currency. A hawkish Federal Reserve and major economic and political shocks taking place across the globe have meant that investors have nowhere to hide other than the safety of the greenback. At current levels, the USD is already causing severe damage to global economies and financial markets, and the risk remains that we could see it gain even further over the near term.
  • A stronger dollar triggers outflows from equity markets and other asset classes sensitive to risk. South Africa, as a small, open, emerging market country, is vulnerable to global developments and even if conditions start to improve locally from either a political or growth perspective, the ZAR will not be able to escape the pull of a stronger dollar.



Although the USD is already severely overvalued, it could still appreciate further, given the current global macroeconomic backdrop. As it does, volatility will increase and vulnerable assets such as South Africa’s will experience even more pressure. However, it should be noted that current levels of USD overvaluation have been difficult to sustain for a significant period of time, indicating that a reversal will come. The catalyst for that will need to be a softening of the Federal Reserve’s current monetary policy stance, which has very little chance of happening before the end of this year it seems.

Medium Term Budget
  • Finance Minister Gondongwana will present South Africa’s Medium-Term Budget Policy Statement on the 26th of October. This will be an important update as the government will need to account for the fading of the tailwind that it received from elevated commodity prices through the earlier months of this year. Investors will also be looking to see what updates are provided on the wage negotiation front, as well as dealing with the country’s failing state-owned entities.
  • The big factors to look out for will be discussions regarding an extension of social grants, as well as the introduction of a universal basic income grant. While the latter is very unlikely to be implemented soon, as indications that it is being looked at seriously could be enough to spook investors who are already wary over SA’s fragile fiscal state.



The pressure for Fin Min Gondongwana and co. to show clear evidence of efforts to consolidate the fiscus is imperative, and the ZAR is likely to remain highly sensitive to any developments on this front over the next 6-9 months. Our expectations are that some measures will be announced aimed at tightening up finances, but not enough to significantly change the current outlook for the fiscus.

Russia – Ukraine War
  • Although the global economy has had several months to adjust, Russia’s war in Ukraine continues to disrupt the supply of goods and services to Europe and some other major economies across the globe. The impact of this on commodity markets remains, although we have started to see a notable pullback in the likes of oil and some metals due to global growth concerns. Nevertheless, gas and energy prices across Europe remain elevated and threaten to keep inflation in the region high and economic growth low.
  • In terms of the war’s current dynamics, it seems as if things are escalating with Russia recently announcing a partial mobilisation of troops. There have also been threats of nuclear action as Russia has stumbled in its advance. Any sort of nuclear war would be a catalyst for a very aggressive stock and bond market sell-off and the prospect of major volatility across financial markets, leading to a deep global recession.



The Russia-Ukraine war has shown very few signs of de-escalating. This keeps the threat of more financial market volatility alive, and will have far-reaching impacts through commodity markets as well. The global growth impact will also persist and add another layer of risk that will keep investors away from riskier assets such as the ZAR.

Eskom Crisis
  • The year 2022 so far has been a record one for loadshedding already. The latest spell has now reached well over 410 hours of continuous loadshedding, a new record in its own right. It appears that for all the talk made by Eskom leadership and South Africa’s President over the last few years, the situation at the state-owned power provider has only worsened.
  • New laws and reforms have been sped up in recent months, a positive takeaway from the situation. However, even with these new power-procurement deals and the freeing up of the grid to independent power producers, loadshedding seems as if it will be with us for several months or even years to come. The risk this poses to the economy cannot be understated, as a country cannot grow without stable power supply. Eskom also poses significant risks to the government’s fiscus and will likely remain a key deterrent to foreign investment for the foreseeable future.



Eskom’s tribulations will keep South Africa’s economy is stuck in a low-growth trap, and downside growth risks remain entrenched. Eskom and the handling of SOEs in general will be the epicentre of South Africa’s economic crisis unless tackled immediately and decisively.

ANC Elective Conference/ Local Politics
  • A looming factor to keep a watchful eye on will be the upcoming ANC elective conference. The conference elects the leader of the ANC who de facto becomes the president of the country for as long as the ANC remains in power. Therefore, this holds great significance in determining South Africa’s policy direction.
  • At the moment, it is expected that President Ramaphosa will win enough backing to remain the leader of the ANC. The question is, does he garner enough support within the party to give him the political capital needed to bolster his cabinet with supporters of his policies. Or, does he win by a narrow margin which will lead to an extended period of hesitant reform and inaction on major economic and political issues. There is also the risk that Ramaphosa could lose to the RET faction, which would have serious negative consequences for the economy and the country going forward.



Although Ramaphosa’s popularity has dropped from the 2019 highs, he remains one of the most favoured politicians within the country. With still strong support among the rank and file of the ANC, the probability of Ramaphosa being re-elected at the December 2022 ANC conference is high. While not necessarily a positive for the ZAR, a Ramaphosa victory will, at the very least, remove a possible event that could trigger a massive deprecation of the ZAR.

FATF Grey-listing
  • Another looming risk is that SA is ultimately placed on the Paris-based FATF’s grey list. Grey-listing would imply that SA’s financial system is ill-equipped to deal with the problems of terrorist financing, customer due diligence, and suspicious transactions in general. Grey-listing would further stifle foreign sentiment, threatening to limit investment flows further. Confounding factors include SA’s highly fragile tax base, a history of corruption, state spending being under deep scrutiny, and the relatively unstable political environment.
  • Falling onto the FATF grey list could further constrain the potential uses of SA’s debt instruments offshore at a time when bond market liquidity factors are already a concern, which the SARB has recently alluded to.



The probability of South Africa falling onto the FATF’s grey list remains high, despite some recent policy changes made by National Treasury. If this happens, the initial shock will be negative for the ZAR and decrease demand for South African assets from foreign investors. However, a grey-listing could be used as an opportunity to make the necessary reforms. This has been done before by countries such as Mauritius.

Worldwide Social Unrest
  • The year 2022 has so far seen some large and long-running anti-government demonstrations occurring in some advanced economies where unrest is generally considered to be relatively rare. Social uprisings have also taken place across several key emerging market economies as the worldwide public reacts to soaring inflation, rising inequality, increased government interference, and a general decrease in living conditions in certain jurisdictions.
  • Mass protests have historically had a statistically significant impact on future economic growth. The risk is also that in trying to appease protesters, governments and other authorities could turn more socialist, increasing public spending at a time when government borrowing costs are rising and fiscal prudence is needed.



The likelihood of social unrest continuing around the globe over the coming months remains high, while the potential for unrest in South Africa is rising given the country’s massive inequality, heightened unemployment, and fragile social structures. As was seen in July 2021, mass unrest in South Africa poses a notable threat to the ZAR and SA assets in general. The associated fiscal risk is, however, even more concerning given its longer-term implications for the ZAR’s resilience and SA’s ability to attract foreign funding and investment.