ZAR: South Africa’s share-price

Jan 7, 2019

It is often said that the currency is like a country’s share-price. There are many outside factors that effect currency values, but in general a currency will strengthen (or at least remain stable) when an economy does well, and weaken (or become less stable) when it performs poorly. So how do perceptions about SA’s future performance influence the value of the Rand, South Africa’s ”share price”?

Despite the handbrake of Exchange Control, the SA Rand (ZAR) remains the 20th most traded currency in the world. SA’s highest ranking was 10th in 1998, but although it has slipped in overall ranking, this has not been due to lower value traded in Rands (which has actually increased). It is simply that trade in other emerging market currencies such as China, Russia, Mexico, and Turkey has grown faster.

The Rand makes up 1% of the world’s daily currency trading. The value of daily trade in ZAR is approximately US$70bn, of which only a third (0.3%, or US$21bn) happens in South Africa. The bulk of trade in Rand takes place outside of SA (mostly in the UK). International perceptions of the country’s future are hence very important in determining the direction of the currency. 

The US$ accounts for more than 80% of the trade in ZAR; this is to be expected as SA is seen as a commodity-based economy, and commodities are prices in US$. However, despite the dominance of the US dollar, the South African Reserve Bank calculates the real effective exchange rate using a broad range (basket) of currencies, including a significantly higher weighting for the Euro than the US dollar. The SARB does this in an attempt to reflect South Africa’s value of foreign trade in goods and services, and not the value of the Rand traded on the financial markets. The relative strength or weakness of the US$ on world currency markets is therefore not the only factor influencing the value of the Rand.

As stated, the ZAR currency exchange market is highly liquid and actively traded. This is good for business and investment activity, but higher liquidity also attracts speculative activity – which in turn contributes to exchange rate volatility. Factors that add to volatility include international trade flows, commodity prices, fellow Emerging Market Economies’ fortunes, and local versus international interest rates.

Exchange rate volatility makes it difficult for businesses to plan. It increases risk and destroys confidence. Wahetever the currency, speculative activity is generally kept in check by a stable political environment, conservative but progressive economic policies, and a number of vectors that contribute to a stable, successful long-term outlook (infrastructure growth, labour market efficiency, investment in health and education, etcetera). It is here that SA comes up short every time.

The performance of the Rand against First World currencies provides a stark manifestation of international investor’s perception of SA’s political and economic risk. The historic trend speaks for itself – and that was in the good old days, before junk bond status and the highly charged political atmosphere that currently prevails.

Expats worry about future buying power: what will their Rand-based savings buy them in foreign currency in 5 years from today? It may be extremely difficult to predict short-term movement, but the long-term trend is convincingly negative. In the 90’s one would get 40 US cents for every Rand that you invested there. Today R1 only buys 6 US cents. What will it buy by the time you retire? Similarly, in the 90’s one would get more than 50 Australian cents for every Rand invested there. Today R1 only buys 9 cents in Australia. What will your buying power be when you reach retirement age?

This picture is the same across a basket of First World currencies. It is therefore clear that negative risk perceptions continue to drive down the value of the Rand. This does not mean that there won’t be sporadic periods of short term, speculative strength: over the last 15 years a number of unexpected external developments – an international property boom, a commodity ”super-cycle”, quantitative easing in the USA and EU, etc. – fortuitously conspired to give the local currency an unexpected, counter-trend hand-up, at times.

But in the medium to longer term the trend is stark, and 25 years after freedom and democracy arrived the politicians in charge still seem incapable of turning matters around. In fact, with deepening junk bond status matters now seem to be accelerating in the opposite direction. The upcoming elections may bring some respite in terms of negative political rhetoric and headlines about matters such as land grabs and corruption, but the long terms prognosis is pretty stark.

Unless there is a compelling reason to expect local investment performance that will outstrip potential devaluing of the currency, every Expat needs to evaluate the risk of remaining invested in long-term, low growth, Rand-based investment products. The core question is whether the current value of your investment, translated from Rands into hard currency, will be worth more or less in the future?