The ZAR has been trading at undervalued levels for some time, with various reasons for the undervaluation. Low sentiment in the bond market appears to be the largest driver of the underperformance, resulting in a far lower percentage of foreign ownership of SAGBs. This is reducing spot currency demand.

Moreover, domestic logistical and infrastructural problems will also reduce foreign currency earning capacity. We illustrate this by looking at ZAR correlations with core factors while adding in a factor that is sensitive to Eskom loadshedding.

Baseline View: While offshore factors are indeed reducing capital availability to EMs, it should be said that much of the ZAR’s underperformance in 2024 is due to domestic risks. ZAR underperformance can emerge in such a setting, leaving the ZAR prone, especially in an environment where offshore risk appetite deteriorates sharply.