Why South Africans need USD diversification

The past month has seen both Moody’s and Fitch Ratings publish their updated assessments of the South African economy. Their conclusions, while diplomatically phrased, are sobering: South Africa’s growth is projected to hover between 1% and 1.5% over the next 12 months, weighed down by sluggish reform, elevated financing costs, and persistent structural bottlenecks in energy, logistics, and state-owned enterprises.

Moody’s has stressed that the country’s cost of capital remains stubbornly high relative to emerging market peers, reflecting both policy drift and weak private investment. While South Africa benefits from deep domestic capital markets and a credible central bank, Moody’s warns that unless reform momentum accelerates, the economy will remain trapped in a low-growth cycle. Fitch echoes this view, having affirmed South Africa at ‘BB-’ with a Stable Outlook on 12 September 2025. It projects real GDP growth of just 1.2% p.a. through 2027, far below the median for comparable peers.

For ordinary South Africans, these credit assessments may sound abstract. But their implications are very real when translated into the value of the rand (ZAR) and the ability of households and businesses to preserve wealth in U.S. dollar (USD) terms.

The currency reality

Slow growth and fiscal risk exert downward pressure on the rand. While ratings’ stability prevents an outright crisis, the long-term trend is unmistakable: the ZAR is prone to gradual depreciation against hard currencies.

Consider a simple example. A R10 million domestic portfolio is currently worth about USD 540,000 at ZAR/USD 18.50. If the rand strengthens modestly to 17.50, that wealth rises to USD 571,000. But if the rand weakens to 19.00, its value falls to USD 526,000. In effect, each rand lost per dollar erodes roughly USD 30,000 of international wealth.

Over a 10-year horizon, the picture becomes stark. At a conservative 4% annual depreciation, R10 million falls to USD 365,000 in a decade. At 6% depreciation, the same capital shrinks to USD 302,000. This represents a 30 - 45% erosion of international purchasing power, even before considering inflation or global cost-of-living pressures.

Why diversification matters

For South Africans with offshore commitments - whether education, travel, property, or investment - this erosion translates into tangible financial pain. Maintaining a portfolio exclusively in rand-denominated assets is, in effect, a bet that South Africa will defy its structural headwinds and achieve reform-led growth. That is a risky wager.

Diversification into USD, EUR, GBP, or AED assets provides more than just currency stability. It offers access to global capital markets, higher-growth economies, and industries (such as technology, healthcare, and infrastructure) unavailable locally. It also shields wealth from the vagaries of domestic policy, fiscal stress, and credit downgrades.

The way forward

The message from Moody’s and Fitch is clear: South Africa’s challenges are long-term and structural, not cyclical. In such an environment, investors and households cannot rely on domestic markets alone to protect their wealth. A strategic allocation to hard currency assets - whether through offshore funds, foreign equities, or USD-linked instruments - is no longer optional. It is a necessity to preserve international purchasing power.

For South Africans who wish to retain the ability to educate children abroad, invest globally, or simply protect the real value of their savings, the case for USD diversification is unambiguous. The rand will remain volatile, and reforms may deliver occasional respite. But over the next decade, prudence dictates a measured shift toward hard-currency wealth preservation.

* Sources: Moody’s Investors Service, Credit Conditions – South Africa, Kenya and Nigeria (Sept 2025); Fitch Ratings, South Africa – Rating Action Commentary (12 Sept 2025); Reuters; News24.

** Oberholzer is a director at Kisch Tax Advisory Services.

PERSONAL FINANCE