Bank of America expects rand at around R17/$ by year-end - and an S&P ratings upgrade
Upbeat
Ratings upgrades are contingent on higher levels of economic growth and a reduction in debt to GDP.
Bank of America (BofA) Securities is forecasting a ratings upgrade for South Africa by year-end while it expects the rand to strengthen to just above R17/$ - provided the nation can deliver sustained economic growth and improve its finances.
The US banking giant expects Standard & Poor’s (S&P) to upgrade South Africa's sovereign long-term credit rating to BB by November 2025, one notch above its current rating of BB- with a positive outlook. A BB rating is still two levels below investment grade on S&P's ratings scale.
BofA says the improved rating relies on South Africa achieving higher levels of economic growth, at or near the 2% level, and a reduction in government debt to GDP. Should South Africa achieve that, there could be further ratings upgrades for the country in 2026 as well.
"Ratings upgrades are likely to follow should South Africa deliver on higher GDP growth and declining debt to GDP," Tatonga Rusike, an economist at BofA, wrote in a client note this week. "We think that S&P and Fitch are the likely movers - first Fitch with a positive outlook. S&P could upgrade to BB in November 2025."
S&P revised its outlook on South Africa's BB- rating to positive from stable in November, citing an expected improvement in economic growth and investment on the back of the formation of the government of national unity (GNU) following last year’s general election.
BofA says the subsequent improvement in sentiment towards South Africa should prompt Fitch to follow suit by raising the outlook on its credit rating from stable to positive during the course of 2025. Fitch assigns a BB- sovereign rating to South Africa, three notches below investment grade.
"We do see the next three years, if we do deliver on stable [economic] growth and debt to GDP declining, it is possible to get up two notches in a period of three years," Rusike told journalists in a presentation on Thursday to unpack BofA’s forecasts.
This week, Finance Minister Enoch Godongwana said South Africa could potentially exit its sub-investment grade or so-called junk rating by 2027, according to an interview with Reuters at the World Economic Forum (WEF) in Davos.
BofA is also forecasting a stronger rand, which it expects will trade at R18.30/$ in the second quarter, about R18/$ in the third and R17.50/$ in the final three months of 2025. The rand will likely trade at about R17.30/$ in the first quarter of 2026. BofA expects. The rand is currently trading at around R18.50.
"We expect dollar-rand to be slightly above R17/$ at the end of this year," BofA strategist Mikhail Liluashvili told media on Thursday. "The rand is the most undervalued currency in the emerging market universe at the moment."
While most investors are bearish on the bulk of emerging market currencies’ prospects against the dollar, Liluashvili says such consensus is often a reliable contrarian indicator. He therefore expects emerging market currencies to surprise the market "to the upside" towards the end of the first quarter.
"Positioning in dollars is crowded and close to all-time highs, at least against EMFX [emerging market foreign exchange]," said Liluashvili. "The rand looks significantly undervalued... which suggests it should be the first emerging market currency to rally should the dollar peak."
BofA forecasts inflation to average 4.3% in 2025, which is below the 4.5% midpoint of the Reserve Bank’s official 3% to 6% target range. Nevertheless, it expects policymakers to make only one 25 basis point rate cut in January and then hold the repo rate at 7.5% for much of 2025.
Should inflation edge above the Reserve Bank’s target, it anticipates a rate hike at the final monetary policy meeting of 2025.
Although the National Treasury has a better grip on spending than 12 months ago, thanks to strong revenue collection, BofA still expects the 2024/25 fiscal deficit to be 4.7% of GDP, in line with government estimates. However, if Eskom’s debt obligations are added to that, then the deficit swells to 5.6% of GDP.
-FIN24
The US banking giant expects Standard & Poor’s (S&P) to upgrade South Africa's sovereign long-term credit rating to BB by November 2025, one notch above its current rating of BB- with a positive outlook. A BB rating is still two levels below investment grade on S&P's ratings scale.
BofA says the improved rating relies on South Africa achieving higher levels of economic growth, at or near the 2% level, and a reduction in government debt to GDP. Should South Africa achieve that, there could be further ratings upgrades for the country in 2026 as well.
"Ratings upgrades are likely to follow should South Africa deliver on higher GDP growth and declining debt to GDP," Tatonga Rusike, an economist at BofA, wrote in a client note this week. "We think that S&P and Fitch are the likely movers - first Fitch with a positive outlook. S&P could upgrade to BB in November 2025."
S&P revised its outlook on South Africa's BB- rating to positive from stable in November, citing an expected improvement in economic growth and investment on the back of the formation of the government of national unity (GNU) following last year’s general election.
BofA says the subsequent improvement in sentiment towards South Africa should prompt Fitch to follow suit by raising the outlook on its credit rating from stable to positive during the course of 2025. Fitch assigns a BB- sovereign rating to South Africa, three notches below investment grade.
"We do see the next three years, if we do deliver on stable [economic] growth and debt to GDP declining, it is possible to get up two notches in a period of three years," Rusike told journalists in a presentation on Thursday to unpack BofA’s forecasts.
This week, Finance Minister Enoch Godongwana said South Africa could potentially exit its sub-investment grade or so-called junk rating by 2027, according to an interview with Reuters at the World Economic Forum (WEF) in Davos.
BofA is also forecasting a stronger rand, which it expects will trade at R18.30/$ in the second quarter, about R18/$ in the third and R17.50/$ in the final three months of 2025. The rand will likely trade at about R17.30/$ in the first quarter of 2026. BofA expects. The rand is currently trading at around R18.50.
"We expect dollar-rand to be slightly above R17/$ at the end of this year," BofA strategist Mikhail Liluashvili told media on Thursday. "The rand is the most undervalued currency in the emerging market universe at the moment."
While most investors are bearish on the bulk of emerging market currencies’ prospects against the dollar, Liluashvili says such consensus is often a reliable contrarian indicator. He therefore expects emerging market currencies to surprise the market "to the upside" towards the end of the first quarter.
"Positioning in dollars is crowded and close to all-time highs, at least against EMFX [emerging market foreign exchange]," said Liluashvili. "The rand looks significantly undervalued... which suggests it should be the first emerging market currency to rally should the dollar peak."
BofA forecasts inflation to average 4.3% in 2025, which is below the 4.5% midpoint of the Reserve Bank’s official 3% to 6% target range. Nevertheless, it expects policymakers to make only one 25 basis point rate cut in January and then hold the repo rate at 7.5% for much of 2025.
Should inflation edge above the Reserve Bank’s target, it anticipates a rate hike at the final monetary policy meeting of 2025.
Although the National Treasury has a better grip on spending than 12 months ago, thanks to strong revenue collection, BofA still expects the 2024/25 fiscal deficit to be 4.7% of GDP, in line with government estimates. However, if Eskom’s debt obligations are added to that, then the deficit swells to 5.6% of GDP.
-FIN24
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