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Different factors have contributed to the gradual decline over the decades, but it is largely due to the fact that SA’s inflation rate is usually well above those of our main trading partners. Having said that emerging markets have brought inflation under control quicker than developed economies.
According to Bank of England, economic theory suggests that a currency will depreciate over the longer term in line with the difference in inflation rates, and in the short term by demand and supply in the foreign exchange markets.
Reality has proved time after time that sentiment and expectations override what are supposed to be proven, undeniable economic principles.
Cost of the dollar in rand – 1975 to 2023
Source: Bank of England, PoundSterling
The rand declined gradually and steadily from the 1970s until around 2000. We went from paying less than 70c for a dollar – yes, we got $1.4 for R1 back then – to paying R6 per dollar by the turn of the century. That was largely the effect of inflation.
Then the rand got hammered by one shock after the next. It rarely won back its losses after each hit.
Some of the hammerings
In the first few months of 2002 the rand fell sharply, from below R8 to the dollar to R11.50. A global bear market reduced appetite for more risky assets, and a banking crisis in SA cut into investors’ confidence even more.
That was the year Saambou Bank, and some smaller banks went bankrupt.
The rand recovered some of its losses, only to crash again when the sub-prime financial crisis played out in 2009. It went back to R9.93.
In 2015, fears about the slowdown in the Chinese economy, uncertainty about commodity prices, and China’s devaluation of its currency saw another sudden depreciation of the rand, and it breached R15 per dollar.
It recovered, but only to around R12. The Covid-19 chaos saw the rand fall to R18.60 in 2020. A partial recovery to R13.90 followed.
It’s about dollar strength rather than rand weakness.
Old Mutual Group economist Johan Els says the current weakness in the exchange rate can be attributed to volatility in the market, largely driven by a surge in the dollar.
“The main reason for a weak rand is that the dollar strengthened due to strong US employment numbers,” says Els.
“The US jobless claims came in much lower than expected, creating high expectations that other employment data, will also show that the US economy is strong. This created expectations that the US Federal Reserve will hike interest again before the end of 2023.
“However, inflation in the US is falling fast and a rate hike might not happen. It is noteworthy that Fed chairman Jerome Powell recently ‘walked back’ the hawkish comments made at the previous monetary policy meeting.
“Still, US rates are remaining higher for longer and supporting the dollar. Any positive data will create more volatility.
“I do not think it will have a lasting impact, The dollar might drift weaker, and the rand can recover somewhat.
Els says the rand is fundamentally weak and can recover to between R17 and R18 to the dollar.
“Domestic factors are not that important right now. It’s a dollar story,” he says.
Not only about the dollar
Nolan Wapenaar, co-chief investment officer at Anchor Capital, also says it is dollar strength rather than rand weakness but highlights a few local factors too.
“This is all about the dollar at the moment. US bond yields have been rising since the Fed signalled more potential hikes at their most recent meeting, while recession risks are growing in the EU. The ‘higher for longer narrative’ means that the dollar may remain stronger for a lot longer than we had been anticipating and hurt the rand.
“It is difficult to get excited about the prospects of the rand in the near term,” he says.
“We think that the rand maintaining these levels would be a good outcome while we work our way past events like the AGOA [African Growth and Opportunity Act] negotiation and the Medium-Term Budget Policy Statement [MTBPS].
“Markets are also likely to be skittish headed into the next election,” says Wapenaar.
He adds that a consequence of a weak currency is that the SA Reserve Bank will be watchful for second round effects from higher fuel costs (on the back of a weaker rand and a higher oil price).
“A potential further hike in the US will also worry the Reserve Bank.
“It certainly appears that the risks of one or more further interest rate hikes of 0.25% in SA are growing,” says Wapenaar.
“If the rand hovers around these levels too long or pushes above R20, then we think that a rate hike is probably warranted,” he adds.
“In the short term, it is all about the approach that Finance Minister Enoch Godongwana takes with the MTBPS in November. Anything based on wishful thinking about a resurgence of economic growth or based on spending our way out of trouble with additional debt, will be met with a strongly negative reaction.”
Annabel Bishop, chief economist at Investec, notes that in addition to the strong dollar because of a better outlook for the US economy, several local factors undermine the rand.
“The dollar is strong as investors are seeing the US economy growing and are attracted to high US bond yields,” she says.
“Locally we have seen the government finance figures that show a significant overspending by government and under-collection of revenue compared to the same period a year ago. It speaks to the risk of a credit downgrade by credit agencies.
“The other concern is that SA is still seeing very low economic growth, which is also a concern for rating agencies,” says Bishop.
She adds that a weak rand could push inflation higher, especially due to the current high oil prices which impact on the price of petrol and diesel.
“Commodities are priced in dollars, and a strong dollar – or weak rand – can negate the effect of the decrease in global food prices,” says Bishop, adding that food is a large component of the SA inflation basket.
“The Reserve Bank targets inflation six to 18 months out, which means that [a weak rand] can result in interest rates staying high for longer than previously anticipated.”
Unfortunately, the combination of high inflation, high interest rates, low economic growth and low confidence also motivates local investors to look for safer havens abroad – putting a little more pressure on the exchange rate.
History shows that expectations of an even weaker rand eventually become reality. It is safe to conclude that the rand is not going back to R10 to the dollar.