Can We Make The Rand Grand Again?
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The USD/ZAR currency pair (US Dollar/South African rand) is closely correlated with the EUR/ZAR (Euro/South African rand) with an 83.9% correlation. Simply put, the performance of the USD and the EUR with respect to the ZAR are one and the same. When the USD or the EUR appreciates, we are likely to see similar trends taking place with respect to the USD/ZAR and the EUR/ZAR currency pairs.
As of Thursday, 17 August 2017, the USD/ZAR exchange rate was 13.169. The 52-week trading range for this currency pair is 12.298 on the low end and 14.748 on the high-end. 10 years ago, at the height of the global financial crisis (August 21, 2007), $1 was trading at R13.17040. The USD appreciated sharply against emerging market currencies, notably the ZAR, in the years following the crisis. Between 2007 and January 2016, the USD gained on the ZAR. It reached a high of R16.44437 on 14 January 2016, before retreating sharply to R12.43849 on 24 March 2017.
Unbeknownst to many millennials in South Africa, the ZAR was not always trading at its current levels. Before Jacob Zuma assumed the presidency, and gross malfeasance engulfed the South African economic system, the Rand was a force to be reckoned with in global financial markets.
South Africa was considered the bright star of emerging market economies in Africa. Gold, platinum, coal, iron ore, tourism and other factors helped to create a positive image of the South African economy.
Economic Malfeasance Impacts Credit Ratings
Enter the Gupta scandal, Nkandla, multiple successive votes of no-confidence in the president, and ongoing fears about nationalization, the exodus of multinational corporations, and a crumbling infrastructure – the result is evident in the Rand. The South African economy continues to absorb swelling numbers of illegal immigrants, many of whom are living in squatter camps where rising levels of ethnocentrism are brewing. A flare-up is imminent.
International credit ratings agencies have downgraded South Africa’s rating over time, with the following ratings and outlooks from major agencies:
- Moody’s assigned a Baa3 rating to South Africa with a negative outlook – June 9, 2017
- S&P assigned a BB + rating to South Africa with a negative outlook – April 3, 2017
- Fitch assigned a BB + rating with a stable outlook – April 7, 2017.
These credit ratings are extremely important to international investors says Weiss Finance professional, Sal Caputo, ‘They determine capital flows into South Africa. Investors, pension funds and sovereign wealth funds look towards credit ratings for their investment decisions in foreign countries. If we wind the clocks back to 1994, Fitch assigned a BB rating, Moody’s a Baa3 rating and S&P a BB rating to South Africa’s economy. While the ratings appear similar today, the sentiment (the outlook) is decidedly negative this time around.’
Pre-Global crisis, in 2006 the USD/ZAR was trading at 6.1392. Put into perspective, R100,000 would buy you $16,288.76, 11 years ago, and that same R100,000 is the equivalent of $7,588.17 today. These figures do not take into account the real money depreciation, or how much more you could have earned by investing that $16,288.76 over 11 years. The differences are dramatic. Inflation in South Africa is currently recorded at 5.1% year on year (June 2017).
This is good news in that it means the real purchasing power of the South African rand is not being adversely affected by rising prices. This is the lowest inflation rate for South Africa in 1.5 years. Conversely, the inflation rate in the United States for the 12 months ending July 2017 was measured at 1.7% – 3 times less than South Africa’s rate.
Clearly the value of the South African currency is being eroded away every year. The current interest rate at South African banks was measured at 6.75% on July 20, 2017. This means that investments in SA banks yield real money growth to capital. Provided inflation is kept in check, and the SA infrastructure is renovated, upgraded and maintained, good governance can help the SA economy to get back on track.
A Thought: In the 1960s, the South African rand was grand, as it traded at a mere R0.72 to the USD. Things have certainly reversed since then, but the Rainbow Nation has the ability to turn a new page and make the Rand proudly South African once again.