South African Reserve Bank Governor Lesetja Kganyago recently remarked that the rand is ‘incredibly undervalued’ and that according to certain studies, it should be trading at around R7 to the US dollar. This article is a comprehensive economic critique of Governor Kganyago’s statement, balanced with South Africa’s recent wins.
WHILE SARB GOVERNOR KGANYAGO’S R7-to-the-dollar statement might appeal to the national desire for a stronger currency, it requires rigorous scrutiny grounded in macroeconomic analysis, empirical evidence, and economic realities. The currency does not strengthen because a model suggests it should; it strengthens when the underlying economic, institutional, and structural conditions are consistent with such valuation. For this reason, any assertion of what the rand ‘should’ be worth must be evaluated alongside the realities of South Africa’s fiscal position, structural challenges, and global risk profile. At the same time, a balanced evaluation must acknowledge the notable progress and institutional wins that South Africa has achieved − wins that, if sustained, could support a stronger currency performance in the future.
To begin with, the governor’s conclusion appears rooted in long-established theoretical constructs such as purchasing power parity (PPP), a model that typically presents the rand as undervalued relative to its developed-market counterparts. PPP compares price levels between countries and assumes that identical baskets of goods should cost the same when exchange rates adjust accordingly. Although academically useful as a long-term benchmark, PPP relies on assumptions that seldom hold in emerging markets. It presumes similar productivity levels, stable institutions, consistent governance, equivalent inflation dynamics, and predictable policy − conditions under which market exchange rates would converge to theoretical values. South Africa diverges materially from these assumptions and as a result, PPP tends to overstate the rand’s equilibrium value. Such models provide intellectual insight, but they cannot absorb the real-world political, structural, and institutional risks that determine actual currency behaviour.
Embedded within the governor’s argument is also the suggestion that markets may be over-discounting South Africa’s risk. This implies that investors are excessively pessimistic and that the rand’s current levels reflect sentiment rather than substance. Yet global markets typically assess currencies based on quantifiable measures: sovereign credit ratings, fiscal sustainability, governance standards, institutional strength, productivity trends, and the performance of strategic state-owned enterprises. When these indicators weaken, currency valuations adjust accordingly. Investors are not arbitrarily punitive; they are responding rationally to the cumulative risks present within South Africa’s economic landscape.
The assertion that the rand ‘should’ be R7 further assumes a much stronger underlying economic performance than what is reflected in current data. For a currency to sustainably trade at such levels, South Africa would need robust economic growth, strong export competitiveness, higher productivity, reduced sovereign debt levels, a stable energy supply, functional transport logistics, and predictable political dynamics. Yet South Africa continues to grapple with deteriorated port and rail infrastructure, governance failures in key municipalities, rising debt service costs, weakening public finances, and one of the highest unemployment rates globally. When viewed against these structural constraints, it is difficult to conclude that global markets are simply mispricing the country.
A significant oversight in the governor’s remark is the assumption that theoretical models can override the lived realities that shape investor confidence. Exchange rates are influenced by the reliability of electricity supply, the efficiency of ports, the stability of political coalitions, the coherence of policy messaging, and the credibility of law enforcement institutions. These are not temporary anomalies − they are the structural conditions that define South Africa’s business environment. Markets price reality, not theoretical potential.
Furthermore, the governor’s statement omits an explicit acknowledgment of South Africa’s deteriorated financial accounting position. The national balance sheet has weakened considerably over the past decade. Debt service costs consume a growing share of the national budget, while failing state-owned enterprises continue to rely on public funds for survival. Persistent irregular expenditure, corruption, procurement inefficiencies, and tax compliance challenges have strained fiscal stability. Sovereign credit downgrades from Moody’s, S&P, and Fitch reflect these underlying risks. In such a context, it is difficult for any emerging-market currency to strengthen sustainably without meaningful improvement in fiscal governance and structural reform.
Yet, while the critique of the governor’s statement is justified, it is equally important to recognise South Africa’s recent wins, which indicate institutional resilience and growing momentum for reform. These developments, though not sufficient on their own to justify an R7 exchange rate, demonstrate that South Africa is not standing still and that progress is indeed being made.
One of the most significant positive developments is South Africa’s substantial progress in remedying the deficiencies identified during the FATF greylisting process. Since being greylisted in 2023, National Treasury, the Financial Intelligence Centre, and the SARB have implemented wide-ranging reforms to strengthen anti–money laundering and counter-terrorist financing frameworks. Recent FATF evaluations have recognised these improvements, positioning South Africa as a strong candidate for removal from the grey list. This progress enhances global confidence in the country’s financial governance and reduces compliance-related barriers to investment.
South Africa has also experienced periods of rand strengthening driven by improved global risk sentiment, better-than-expected inflation moderation, stronger commodity prices, and renewed appetite for emerging-market assets. These recovery phases underscore the resilience of the rand and demonstrate that when external conditions are favourable and domestic risks are better managed, the currency does respond positively. The SARB’s strong reputation as an independent and credible central bank contributes significantly to these rebounds.
Additionally, National Treasury has maintained a commendable degree of fiscal discipline despite mounting pressures. SARS continues to demonstrate improved revenue collection through enhanced compliance systems, digital modernisation, and targeted enforcement strategies. Treasury’s unwavering commitment to expenditure ceilings, even in politically sensitive environments, reflects institutional maturity that many emerging markets lack. These efforts support macroeconomic stability and serve as important foundations for long-term currency strength.
Other wins include the revival of tourism, increasing private-sector participation in energy generation, agricultural export expansion, record citrus export seasons, and renewed growth in renewable infrastructure projects. These sectors not only boost GDP but also strengthen South Africa’s foreign exchange position and enhance medium-term growth potential.
In reality, the rand trades where it does, because markets are responding to both the risks and the opportunities present within South Africa’s economy. The depreciation of the currency reflects structural weaknesses, but the intermittent strength and resilience of the rand reflect the country’s institutional wins and economic potential. The pathway to a sustainably stronger currency is not theoretical − it is structural. It will be achieved when South Africa continues to modernise its energy grid, fix its logistics bottlenecks, improve governance, enforce fiscal discipline, and unlock productivity gains through skills development
and innovation.
Governor Kganyago’s assertion may hold theoretical merit, but theoretical value does not equate to market value. The difference between the two represents the gap between South Africa’s potential and its structural reality. Encouragingly, the country’s progress on greylisting, revenue collection, monetary policy credibility, and sectoral resilience shows that this gap is not insurmountable. A stronger rand is possible − but only once South Africa becomes a stronger and more efficient economy, supported by consistent reforms and the continued strengthening of the institutions that are already demonstrating meaningful progress.
Author
Siyasibulela Kepe CA(SA), Fairsure Investment Managers
