The state of the Rand, just like the Springboks’ results, is very emotive and affects how we view ourselves as South Africans. It’s worth noting that when the 2011 Rugby World Cup kicked off in New Zealand, the Rand-Dollar exchange rate was about R6.70 to the US Dollar. Fast forward four years…on 24 August, 2015 the Rand reached its lowest level against the Euro, US dollar and British pound simultaneously.
Many say that a plunging rand is the final proof that South Africa is on an eternal slide into oblivion. Over the last few weeks I’ve heard people say: “It’s never coming back.” However, in over 21 years of living in South Africa, I remember periods when people said the very same thing. So what’s happening with the Rand?
The Rand was up …
The Rand has been strong because since 2008, asset managers globally were looking for good investment yields. South Africa offered an interest yield relatively higher than developed economies, it was an emerging market, it had the World Cup coming, it was a major supplier of commodities, it was the gateway to Africa. A recent Moneyweb article gives further background:
When the Global Financial Crisis hit, central banks responded with monetary easing, flooding their respective economies with money, firstly to provide their banking systems with much needed liquidity, and also to stimulate investment as interest rates were close to their lowest levels. But the consequence was that, instead of lending the money to entrepreneurs, banks invested a large portion of it in global bond markets where they could earn higher interest.
According to Willem van der Merwe, CEO of Sygnia Securities: “South Africa’s currency appreciated not long after this liquidity expansion because, since the crisis, we were paying fairly high interest rates. In the US, banks would borrow from the Federal Reserve, at maybe a quarter or half of a percentage point, and invest it in South Africa at seven or eight percentage points. And they made huge profits.”
The rand also strengthened because of a resources boom driven mostly by China’s response to the global economic slowdown, where a government stimulus of almost $587 billion funded an infrastructure development programme that saw mining stocks, and the currencies in which they traded, rise.
And then it’s down …
It all changed in 2011, when the global economy started to show some signs of recovery. China’s stimulus package was petering out and the South African economy was laid bare, as our internal struggles forced investors to consider alternative destinations. And, since then, the rand plummeted, depreciating in every year that followed.
“It’s very difficult to pinpoint the exact reason why that happened. I think it was a combination of factors” says Van der Merwe. “At that stage, foreign investors owned around 40% of our domestic bond market, and the same of the equities market. And it got to a point where the market got saturated and the level of monetary expansion reduced.
We also had problems locally that came to the fore: electricity provision, labour market unrest, the level budget deficit, the trade deficit, the fact that we couldn’t get the economy to grow at the rate it needed to…And slowly as investors realised South Africa was facing a lot of problems that weren’t going to go away anytime soon, the massive currency inflows became outflows.”
We are not alone
Globally, investors have pulled $1,3 trillion out of emerging markets in the last 12 months. Investors are selling to get their money out of emerging markets, but not just South Africa. Commodity prices have collapsed and the super cycle is over for commodities and as a result, similar economies to ours are also suffering with massive depreciation in their currencies. There is no doubt that two of our BRICS partners are far worse off than we are: namely Russia and Brazil, which are both down 50% against the US Dollar in the last three years. But it is interesting to see that Chile and Australia, which are also great suppliers of commodities, have also collapsed. See graph
We all measure the Rand against the Euro, Dollar and Pound, but these are ‘premiership’ currencies in developed economies. We operate in the ‘second division’ and should measure ourselves against these ‘second division’ countries globally. Compared to other second division countries, we have done fairly well. This is not to say that the SA story is a great one at the moment: even though we have a credible plan in the NDP, we lack the leadership to effectively execute it. Our government employs far too many people, and the commodity crash (40% in the JSE) will mean hundreds of thousands of jobs lost, which will most likely lead to further social unrest.
How will it affect me?
The Rand’s demise is felt most strongly by those who buy imported goods or travel overseas, who will experience a significant price increase. Alternatively, if you have invested offshore, your investments will be protected. Going forward, it is important to note that the Rand, like any currency, is also a cyclical asset. Like commodities, it is a sell for most investors, but things will change. We don’t know when, but when it does happen it will be an important decision for the investment managers to call early.
We believe that we should all brace ourselves, as our currency could get worse in the short term. Hopefully, the opposite is true of our rugby!