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Making cents of the Rand: Are we at the mercy of Jacob Zuma?

by Andrew Rissik | May 26, 2017
  • It’s been a while now since Pravin Gordhan was removed as Finance Minister, an event that triggered a series of downgrades by the international ratings agencies, Fitch and Stand & Poor, where our sovereign credit rating was relegated to sub investment grade or junk status. Well, Armageddon has not happened and many people seem confused as to why the Rand has not collapsed, but has in fact strengthened at times in the past few weeks.
    zuma under questioning

    There are two broad factors that one needs to look at when trying to understand why the Rand behaves the way it does - sentiment and fundamentals.

    How our currency is at the mercy of unpredictable sentiment

    This is what’s responsible for the short-term, wild fluctuations that we often see in the price of the Rand against so-called hard currencies (the Dollar, Euro, Pound, Yen etc.). One also needs to look internally at South Africa and what’s driving the market sentiment, as well as what’s happening outside of the Republic that has an impact on how we are viewed.

    As the last 16 months have shown, local and international political uncertainty is a big driver of sentiment-based trends.

    Every day we read about our infamous President who seems hell-bent on destroying the very fabric of what we have built in South Africa over the past 23 years. On his own mission, he hires and fires at will, backed by blind loyalists who support the destruction of their party headed by a man who never acts in their best interest.

    In the last week we’ve seen the Rand rebound strongly against the US Dollar, Euro and British Pound even on the mere suggestion that the ANC might be considering a recall of President Zuma. We have seen Zuma slip the noose several times over the last 24 months but it is increasingly looking like he is running out of lives.

    Albeit stressful, and hard to plan for when you’re an investor, it's a sign that the checks and balances in our constitutional democracy, although under attack, are not to be written off just yet. However, it’s not all just home grown sentiment that drives our beleaguered currency up and down.

    Just look across the Atlantic and what do we see? President Donald J. Trump! The only major difference between our president and this man is that the former reality TV star influences the world and the value of the all-powerful US dollar too. Who would have ever believed that the politically-induced volatility in the US in the past year was possible. Well it is, and I’m sure it’s here to stay for a while and will have a massive impact on the Rand’s performance.

    How fundamentals are keeping the Rand pegged back

    Looking at the local market on a longer-term basis and understanding what will drive the value trend of the Rand against the hard currencies is arguably more important for investors than the wild short-term fluctuations driven by political noise and day-traders.

    The credit downgrade plays a massive role in determining fundamentals. As a result of the downgrade, interest rates will rise and South Africa becomes a riskier investment destination. Expect to see inflation increase, this, together with our endemic problems of low productivity and high relative cost of labour, means that the Rand will need to devalue to keep South Africa competitive in export markets.

    On the other hand, as an emerging market currency, we also get lumped with the likes of Turkey and Brazil, and recently the international community has looked favourably on emerging markets as risk appetite has  become stronger. This has helped the Rand, however, as the recent political crisis in Brazil has demonstrated, investors are very willing to drop an emerging market currency if they smell a rat. The Brazilian currency shed 10% in one day when their president was implicated in a bribery scandal. Stories like these are not uncommon and can serve as a warning to putting too much stock into general emerging market rallies.

    When it comes to emerging market currencies, no discussion of fundamentals is complete without delving into commodities. Recently, there has been a muted recovery in the price of most commodities, so South Africa stands to benefit from this in the medium- to long-term. In addition to this, the recent drought (apart from in the Western Cape) has broken and the agricultural-sector, a large exporter, will see some growth in the year ahead whilst we rely less on imported food - this is also good news for the Rand.

    Local consumers are cash-strapped and buying less, which translates into lower imports, again a positive for Rand strength. So in a way many medium-term fundamentals appear to be pointing in the right direction with just a few dark (sometimes very dark) clouds on the horizon.

    Be wary of speculation

    The Rand is one of the most speculated/traded currencies, relative to its market share of global currency trade. This, over and above what I’ve already pointed out, makes the volatility factor in the sentiment-driven swings even more terrifying. Until recently, the Rand was the most volatile EM currency, however recently we have slipped back into second place to the Turkish Lire… Nothing to be that proud of!

    South Africa offers some of the highest money market interest rates in the world, so why wouldn’t fund managers dump short-term cash into our markets as they aggressively seek yield which in today’s world is so hard to come by? Just remember that this is flighty cash, and whilst it trickles in slowly, when the risk trend and perception reverses and the Rand starts falling, this money flies out of the system at an alarming rate, contributing to a speedier devaluation.

    Provided the government takes heed of the warning shots fired by the ratings agencies and changes their behaviour, we may see the continued 7 to 8% average slide of the Rand over the longer term, however if we get pushed deeper into the junk bin, a real collapse could be inevitable. Truly, the next two years will be perhaps the greatest test of our young democracy.

    Andrew Rissik is the Director of Forex and International Projects at Sable International. If you would like to discuss sending money abroad, or if you'd like to explore your international citizenship options, send an email to and one of our experts will get back to you.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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