Every day, more and more ink gets spilled – as financial experts debate the reasons for the Rand’s galling instability on the global currency market. Since October of last year, the Rand has depreciated by 35% against the US Dollar (the lowest point being 10th of January this year), before clawing back about 25% of this devaluation to trade at an exchange rate of roughly R14.20/$1 at the end of April 2016.
While many will have you think that the reasons for this instability are entirely political, the situation is of course far more complicated and nuanced than that. This article attempts to identify some key factors in the Rand’s fluctuating performance on the global market, to try and give a sense of the variety and complexity of the causes involved.
The Shadow of 2009
The Great Recession of 2008/2009 – also known as the ‘Sub-Prime Mortgage Crisis’ – is an intriguing, complicated story all of its own. Briefly outlined, what happened is as follows: in response to Alan Greenspan announcing that the US federal interest rate would remain at an investment-repelling 1%, venture capitalists the world over sought to make higher gains through providing the general public with unprecedented access to mortgage loans with ‘sub-prime’ and ‘adjustable’ interest rates. The usual requirements for housing loans – such as proof of income – were relaxed, as credit was given out all too freely. The goal, for brokers, was then to sell this debt on (in the form of ‘packages’ known as Collaterised Debt Obligations, or CDOs) to huge conglomerate banks, who felt confident they could absorb the risks involved and benefit from the relatively high rate of return.
Of course, as people who could never afford the loans in the first place started to default on their repayments, this bubble burst – leading to the greatest worldwide economic downturn in modern history. Emerging economies such as South Africa’s are still reeling from the effects of this 2009 Recession, as a risk-averse atmosphere has predominated global currency markets – and major global players, such as the US with its energy reforms, have sought internal solutions that tend to ‘freeze’ currencies such as the Rand out of growth and development.
Other geopolitical influences
Of course, in a global world, the interconnectedness of all economies and markets cannot be underestimated. In June 2015, the Rand lost 26% of its value following unrest in Chinese markets brought about by a 2% devaluation of the Yuan (part of a greater strategy to boost China’s competitiveness on the export market).
For South Africa, and other African economies which depend heavily on exporting oils, minerals and other commodities to China, this move – which saw a steep fall in commodity prices and an attendant freeze on currency market growth – has hit hard, and experts predict more potential instability surrounding Chinese economic policies in 2016.
“The reality is that South Africa is in a period of relatively low economic productivity. The reasons for this are numerous – some are historical, some are contemporary – but the upshot is that we rely, for our economic stability, on robust commodity export prices.”
When these markets turn against us, as they will do from time to time, some depreciation in the value of the Rand will be inevitable.
Undervaluation & Over-Trading
The Purchasing-Power-Parity (PPP) Index, also known as the ‘Big Mac Index’, asserts that South Africa’s currency is one of the most undervalued in the world. The aim of the index is to show the ‘real value’ of a currency – as it affects consumers – by comparing what you would pay for a Big Mac hamburger in your home country against its benchmark US Dollar price. This index shows that South Africa should be trading at around R6 or R7 to the Dollar – hence a supposed ‘real-world’ devaluation of around 60% less purchasing power.
Of course, studies such as this are culturally biased and hardly ‘scientific’, but there is some truth to the idea that South Africa’s currency is undervalued. The reasons for this, once again, are manifold – but one extra-national concern centres around the practice of over-trading the Rand on global financial markets.
The Rand only accounts for a shade under 0.3% of the world’s daily financial market turnover, yet the Rand also makes up nearly 1.1% of the world’s daily trading. Essentially, this means that – although the Rand is used extensively on global markets for trading purposes – it does not realise the kind of yields as a currency that one would expect. The chief reason for this lies in asymmetric global market exchange controls: non-South African residents are able to buy or sell in Rand with little or no financial restrictions, while South Africans are unable to speculate with foreign currency in reciprocal fashion.
Local pressures and vicious circles
There are, of course, numerous national (or ‘internal’) factors that affect the value of the Rand. Since the backbone of South Africa’s modern economy has been the mining sector, labour unrest, policy uncertainty and competition between unions has seen a skeptical attitude on the part of foreign investors in recent years. On the whole, global investors have been net sellers of South African bonds and equities in the period 2003-2015. Other social issues – such as corruption, rising unemployment and the need to address systemic inequalities in almost every facet of daily life – have further weighed down the economy, causing a lagging GDP and concern over the nation’s reliability as an economic partner. The recent Finance Minister scandal, coupled with fears over a downgrade in South Africa’s international credit rating, have only sown more doubt in the minds of investors looking to back the Rand on global financial markets.
“Outside of property, investors are seeking tax-efficient solutions to house their financial assets, with the underlying assets invested in low cost, smart passive strategies.”
However, it is important to appreciate how difficult any attempt to address these issues will prove to be. As this article has tried to explain, the interconnectedness of the various elements of our economy – and the circumstantial, almost alchemical way in which they seem to interact at times – means that any positive adjustment in one area can often lead to (either necessary or unintended) negative consequences in another.
Fatima Bhoola, a lecturer in economics at Wits, wrote in the Mail & Guardian (18 January) about the challenges facing policy – makers looking to revitalise the stagnating Rand. She explains that if the central bank decided to cut consumers a break by resisting inflation, it could raise interest rates – however, this might only further stifle an economy that is only growing at 1.5% annually. She also points out that, in environmental terms, the Rand’s struggles could not have come at a more ill-opportune moment: the country has been in the grips of its worst drought since 1992, pushing the price of staple foods such as white corn to cripplingly high levels on the South African Futures Exchange.
“Amongst private clients looking for direct foreign investment we see investment trends into property in places like Manchester (the UK), Melbourne (Australia) and Lisbon / Cascais (Portugal) as well as the USA.
Portugal in particular has the added bonus of a very attractive residency option with the investment. Outside of property, investors are seeking tax-efficient solutions to house their financial assets, with the underlying assets invested in low cost, smart passive strategies. This shields them from income, capital and inheritance tax liabilities, predominantly via the UK.
– Andrew Rissik, Managing Director, Sable International Projects
The way forward
The bottom line is that the Rand – like many of the world’s ‘emerging currencies’ – will continue to fluctuate for the foreseeable future. The reasons for this instability are never entirely local: we are embedded in a global financial system, and the whims and caprices of foreign governments and international markets will continue to affect the performance of the Rand on the world’s economic stage.
We can only hope to keep our house in order: to resist desperate measures such as those taken by the Costa Rican government to attract foreign capital, and to try and slowly restore a sense of calmness to our beleaguered economy. Currency speculation is often described as a ‘confidence game’ – and it’s here, perhaps, that South Africa can achieve the most significant gains in 2016.