By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano & Ame Muller
The rand entered 2026 trading weaker than its estimated fair value. While domestic fundamentals remain broadly supportive, elevated global uncertainty, and the associated periodic bouts of risk aversion, have sustained some risk premium on the currency.
Our exchange-rate framework estimates a fair value of just below R16.20 to the United States (US) dollar in 1Q26, compared to a market exchange rate closer to R16.51 to the dollar at the time of writing. This suggests that the rand remains modestly undervalued relative to levels implied by underlying macroeconomic fundamentals.
The framework identifies three structural anchors that determine the rand's long-run equilibrium value against the dollar: relative prices, terms of trade and relative productivity.
Aligning with purchasing power parity theory, higher domestic inflation relative to the US tends to weaken the equilibrium value of the rand over time. Terms of trade, capturing the relationship between exports and import prices, improve South Africa's (SA's) external position and supports the currency when export commodity prices strengthen. Lastly, relative productivity reflects SA's competitiveness in relation to the US, with sustained productivity improvements strengthening the rand's equilibrium value.
In the short-term, however, exchange rate movements are shaped by a different set of factors. These include the market's momentum, the dynamism in commodity and trade conditions, sovereign risk sentiment, interest rate support and what we term the "fair value pull" - the tendency for exchange rates to gradually gravitate towards levels implied by economic fundamentals after periods of over or undervaluation. Figure 1 illustrates the relative importance of these short-term drivers based on the model's estimated coefficients.
Currently, upside risks to the rand include stronger commodity prices, a reduction in SA's sovereign risk premium, improved domestic growth and productivity, and a cyclically weaker US dollar. Downside risks include heightened geopolitical tensions and risk aversion, any deterioration in SA's fiscal outlook, and weaker global trade conditions which could dampen commodity prices and SA's growth outlook.
Taken together, our framework points to a currency that remains somewhat weaker than implied by fundamentals, but one where a gradual process of stabilisation is likely as valuation effects and supportive domestic factors (including a more constructive view by rating agencies on SA's outlook) counterbalance an uncertain global environment.
Week in review
Real Gross Domestic Product (GDP) expanded by a stronger-than-expected 0.5% quarter-on-quarter (q/q, seasonally adjusted) in 1Q26, a modest acceleration from 0.4% q/q in 4Q25. On an annual basis, growth accelerated to 1.9% year-on-year (y/y) from 0.8% y/y in 4Q25, largely reflecting a rebound in agricultural growth to 5.3% from -12.8%. Meanwhile, the mining and quarrying as well as finance, real estate and business services sectors also experienced growth acceleration.
The FNB/BER Building Confidence Index fell to 38 points in 2Q26, from 42 in the previous quarter, reflecting weaker sentiment across the building sector as activity slowed and profitability came under pressure. Rising input costs, linked in part to the Middle East conflict, have disrupted momentum, leading to project delays and tighter margins, while softer demand has further weighed on business conditions. Both non-residential and residential construction activity weakened, with subcontractors particularly affected by reduced demand for smaller, discretionary projects as households cut back amid rising living costs. Although activity among architects and quantity surveyors remains relatively resilient, building investment continues to contract, pointing to sustained weakness in the near term.
The current account surplus widened sharply to R190.7 billion in 1Q26, up from R50.2 billion in 4Q25. As a percentage of GDP, the current account rose by 2.4%, from 0.6% previously. This was driven by a widened trade surplus, rising to R437.9 billion in 1Q26 from R282.2 billion in 4Q25. This reflected a R78.3 billion increase in exports alongside a R96.8 billion decrease in imports, reflecting both volume and terms of trade gains. However, the surplus was partly offset by a wider deficit on the services, income and transfers account, to R247.2 billion from R232.1 billion, mainly due to higher primary income and transfer outflows.
Mining production (not seasonally adjusted) expanded by 8.2% y/y in April, up from 2.5% in March. Seasonally-adjusted mining output rebounded by 3.3% m/m, following a 4.8% contraction in March. The largest positive contributors were Platinum Group Metals (PGMs), chromium ore, and manganese ore, while coal was the largest detractor. Overall, mining output rose by 2.4% in the three months ending in April compared to the previous three months.
Manufacturing output (not seasonally adjusted) declined by 2.9% y/y in April, following a 1.5% increase in March. On a seasonally-adjusted basis, manufacturing production declined by 2.7% m/m, after rising by 1.2% in March. The largest detractors were wood and wood products; paper, publishing and printing; basic iron and steel; non-ferrous metal products and metal products and machinery. As a result, manufacturing output declined by 1.3% in the three months ending in April compared to the previous three months.
Weekly Round-Up: Economics from Broader Africa
