Rescuing the rand

South Africa will need more than a growing economy and political stability to rescue the rand, as the country’s currency has taken beating after beating over the past decade.

This is according to Future Forex CEO Harry Scherzer, whose comments come as the rand is under significant pressure this week.

On Monday, 5 August, the rand weakened significantly to its worst level in a month, reaching R18.50 to the dollar. 

This decline was part of a broader global market meltdown triggered by concerns about a potential economic slowdown in the US.

Investors increasingly worry about the possibility of a recession, leading to a risk-off sentiment and a surge in demand for safe-haven assets. This negatively impacted emerging market currencies like the rand.

Markets have since recovered from this turmoil, with most currencies trending back towards the levels seen last week.

The rand opened below the R18.50 handle on Tuesday, 6 August, after risk sentiment improved in the early morning hours. 

“We will still take our cues from global risk sentiment and could expect volatility to remain for the days to come,” said TreasuryONE Currency Strategist Andre Cilliers.

This week is just one of many rollercoaster rides the local currency has taken since the start of this year.

The year began on a relatively positive note for the rand, with the currency showing resilience in the face of global economic challenges. 

Supported by higher commodity prices, particularly for gold and platinum, the rand managed to hold its ground against major currencies.

However, the second quarter brought a shift in fortunes for the rand as uncertainty loomed over the outcome of the May general election, with the ANC set to lose its majority for the first time in 30 years.

This saw the rand depreciate significantly against the US dollar, reaching levels not seen in several years.

However, Scherzer said that international investors were significantly optimistic after South Africa announced a government of national unity (GNU) in mid-June. 

“The members of the GNU, it was thought, would help create the kind of stability that fostered economic growth,” he said. 

That optimism significantly affected the rand, which strengthened to below R18.00 to the US dollar for the first time since 2023. 

Since then, enthusiasm for the rand has cooled slightly, with the local currency hovering between R18.00 and R18.60 in July. 

“This has had nothing to do with the GNU, which appears to have refound stability following some jitters around the makeup of its cabinet,” Scherzer said. 

“Instead, the retreat was primarily a result of the Monetary Policy Committee (MPC) putting an anticipated interest rate cut on hold, following the lead of other central banks around the world.”

He explained that these currency movements show that while a growing economy and political stability will generally be good for the rand, other factors are at play, some of which are completely beyond South Africa’s control. 

“These uncontrollable factors mean that people and businesses making significant international money transfers should focus less on the rand’s fluctuations and more on which provider they use,” he cautioned.

“Of course, political stability and economic growth are to the benefit of a currency. It should be clear, however, that they’re far from the only factors at play.”

The rand has experienced a significant decline over the past few decades, primarily due to a combination of economic mismanagement and political uncertainty.

In the 1970s, the rand was stronger than the US dollar. However, political unrest, sanctions, and economic mismanagement led to a sharp depreciation in the 1980s. 

While the advent of democracy in 1994 brought some stability, the rand’s long-term trend has been downward.

During the period under President Thabo Mbeki, relative rand strength was seen due to sound economic policies and fiscal discipline. 

However, this trend reversed under subsequent administrations, with increasing government spending, debt, and economic stagnation leading to renewed rand weakness.

Currently, the rand is significantly undervalued, reflecting a lack of investor confidence in South Africa’s economic future. 

Old Mutual economist Johann Els has calculated that the rand should be trading much stronger than it is, with its real value closer to R15/$. 

However, South Africa’s poor economic performance and deteriorating government finances have resulted in investors undervaluing the currency. 

The ongoing depreciation of the currency has negative implications for the economy, including increased import costs and reduced purchasing power for consumers.

While the formation of a GNU focused on driving growth for South Africa is a major step forward, it will require a lot more to restore the currency to its former glory.