Rand Devaluation: Impact on South Africa Economy

 

Not so long ago the South African Rand was named the world’s worst performing currency and despite an aggressive devaluation which has sent the USD/ZAR currency exchange rates to a new historical high level, it was only a matter of chance and luck not getting that title again. A combination of both fiscal mismanagement, rising political tensions and corruption has made Latin American currencies like Argentinian Peso to take the title as the world’s worst-performing major currency. The South African Rand dropped 26.15% in 2015 which was enough to place the Rand in the third place after the Brazilian Real.

Source: cnn.com

Source: cnn.com

It has been a volatile year so far for the South African Rand and now the pair has been hit by the China’s Yuan devaluation as well as the slowdown in the Chinese economy. South Africa’s economy is heavily dependent on exporting goods to China, which is Africa’s biggest trading partner. The global economy remains very weak with the economic slowdown in China and other emerging markets being the main drivers of lackluster global growth, which poses the greatest threat to the recovery of the South African economy.

As the global economy falters then this will obviously have a negative impact also on South Africa economic growth and implicitly will put downside pressure on the Rand. The commodity prices have fallen substantially and this is reflected into the commodities supercycle as lower commodity prices have significantly impacted many of South Africa’s biggest companies, especially within the mining sector which account for about 50% of the South Africa’s foreign exchange earnings.

Theory says that a weaker currency will help boost the exports as you will be able to become competitive price-wise, however, the weakness in global growth has made a devalued currencies less useful in boosting exports. Under this circumstance, a weaker Rand is hurting the local economy even more as it will put upward pressure on inflation, while this, in turn, will affect the purchasing power of your money which decreases over time.

When we look at the impressive Rand depreciations the story is not fully completed without looking at its biggest counterpart which is the US Dollar. The US Dollar bullish super-cycle that started in the summer of 2014 has long lasting fundamental drivers that are not just some ephemeral conditions. The dollar trade-weighted cycles tend to last on average 8 years, which makes the Rand exchange rate outlook even more negative.

Source: Thomson Reuters, Credit Suisse research

Source: Thomson Reuters, Credit Suisse research

Emerging markets like South Africa is the one exposed more to the downside risks caused by the higher US Dollar. After the financial crisis of 2007, the US Federal Reserve lowered interest rates at a historic low level in order to stimulate the economy and that availability of cheap credit made it attractive for many emerging market countries to finance their needs. Today, however, is a different story altogether as in the last month of 2015 the Fed has hiked rates for the first time in the last decade, a move that it will make it harder for an in debt country like South Africa to finance their US Dollar denominated debt. The market consensus and according to Goldman Sachs forecast the Fed is expected to raise interest rates four times in 2016 and many analysts are predicting that ultimately South Africa will be forced to seek help from the IMF, which will make for a very volatile currency exchange rates.

What you can do in order to protect yourself against the extreme and a very volatile Rand is, to either move your saving offshore and secondly, the best thing you can do, is to keep your savings in other currencies than the Rand, but preferably the US Dollar which is the only “game in town” as during financial instability the Us Dollar is perceived as the ultimate safe-haven currency.

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