Written by Jeffrey Cammack: Published: January 19, 2016
The ZAR in 2015
The ZAR dropped 26.15% against the USD in 2015, which made it the third worst performing currency after the Brazilian Real. In December 2o15, the South African Rand took the title of the world’s worst-performing currency, and since that time, the ZAR has continued to devalue aggressively, sending the USD/ZAR exchange rates to new highs.
Downward Global Pressure
It has been a volatile year for the South African Rand which has now been further impacted by the Yuan devaluation and the Chinese economic slowdown. South Africa’s economy is heavily dependent on the exporting of goods to China. The major threat to the recovery of the South African economy is the weak global and emerging market growth forecast.
As the Global economy falters, there will be a knock-on effect for South Africa’s economic growth, which will put downward pressure on the Rand. Commodity prices have fallen substantially in 2015, and lower commodity prices have significantly impacted South Africa’s main exporters in the mining sector which account for about 50% of foreign exchange earnings.
While a weaker currency usually helps boost exports, the weakness in global growth has made a devalued currency less useful in doing so. Thus a weaker Rand is hurting the local economy as it puts upward pressure on inflation, and adds downward pressure on purchasing power.
To understand the extent of the ZAR depreciation, we need to look at it in the historical context of the USD/ZAR pair. The USD bullish super-cycle that started in the summer of 2014 has long-lasting fundamental drivers, and since the USD trade-weighted value cycles tend to last an average of 8 years, the ZAR exchange rate outlook should remain negative for the medium term.
Emerging Markets Growth
Emerging markets like South Africa, are more exposed to the downside risks caused by a higher-value USD. After the financial crisis of 2007, the US Federal Reserve lowered key interest rates to historically low levels in order to stimulate the US economy. That availability of cheap credit made it attractive for many emerging market economies to finance their economic growth, buy borrowing from the United States.
In December of 2015, the Fed hiked rates for the first time in the last decade, in a move that it will make it harder for countries like South Africa to finance their USD denominated debt.
The market consensus and Goldman Sachs forecast are that the Federal Reserve is expected to raise interest rates four times in 2016. This could lead South Africa to seek help from the IMF, which would create economic instability and potential continued ZAR devaluation.
To protect against the depreciating value of the ZAR, you can either move your savings offshore or keep your savings in other currencies than the ZAR. It is preferable to keep savings in USD as during financial instability the USD is perceived as the ultimate safe-haven currency.