A Stronger rand does South Africa really needs it?

South Africa’s new president calls the current optimism experienced in the country as “a new dawn.” It’s a sentiment the country's volatile currency seems to have embraced, pushing below 12 rand to $1 when Cyril Ramaphosa took over the ruling party. 

The currency, which has risen by some 15% in the last couple of months, maintains its newfound confidence as Ramaphosa became the country’s fifth president and brought back finance minister Nhlanhla Nene—whose 2015 axing first triggered the rand's downward spiral.

Once pegged to the country’s vast gold reserves, the rand used to be 2:1 to the pound and nearly as strong as the dollar until a generation ago. Today, however, it seems pegged to the anxiety of post-apartheid South Africa. A stronger rand may boost the national psyche, but it's really not clear if South Africa really wants its currency to keep getting stronger.

Mixed messages

South Africa’s sluggish economy finally began to see growth last quarter, thanks mainly to the agriculture, mining and manufacturing. A stronger rand may be the undoing of that, even if only in the short term as prices adjust, cautions Jeffrey Dinham, an economist at the Johannesburg firm Econometrix.

[pullquote]“I think the key is to have a stable currency. Stable allows people to make predictions, which helps boost confidence.”[/pullquote]For a commodities-driven economy like South Africa’s, the stronger rand means lower revenues. It also isn’t good news for manufacturing exports,weakening the country’s competitiveness. The agriculture sector could experience a similar revenue challenge, while it already faces lower output due to the drought in the Western Cape but at least farmers can service their debt better.

For companies’ stocks too, a stronger rand is a mixed blessing. Companies listed both at the Johannesburg Stock Exchange and abroad lose value in the immediate outlook, explains Michael Treherne, a portfolio manager at Johannesburg-based Vestact. In the long term, offshore profits are also worth less in rands. On the plus side though, companies looking to expand globally will find it cheaper to do so.

“I think the key is to have a stable currency,” said Treherne. “Stable allows people to make predictions, which helps boost confidence.”

Mind over matter

In recent years the rand weakened, South African consumer confidence dipped to apartheid-era lows. The sovereign credit rating downgrade by two ratings companies was top of mind for many and the weak rand hiked inflation, affecting the price of everyday items. Already indebted both in the state coffers and ordinary households, the downgrade made debt even more expensive.

The grim outlook had an impact on the economy and the country’s psyche so the rand’s rise boosts that confidence “when people see inflation falling, when they see their money is worth more in dollars and euros,” said Dinham.

“From a consumer perspective, a strong rand is definitely a good thing,” said Dinham. Consumer spending makes up about 60% of the GDP and South Africans buying more goods boosts the economy. A stronger rand keeps transport and fuel costs down since South Africa is an oil importer, he said. That, along with lower inflation, keeps food prices down, which to most South Africans feels more real to their pockets than policies from Pretoria and Cape Town.

“A lot of things that are driven by sentiment also have a real impact on the economy,” said Dinham. The usually jittery currency stayed firm  as now former president Jacob Zuma’s corruption-addled administration began to end.

A malleable currency

South Africa’s currency is prone to manipulation, though. Last year, the country’s Competition Commision found that 17 banks, both local and international, were colluding on the rand dollar exchange rate to turn a profit.

Like Turkey, Russia and Brazil, South Africa’s economy allows large amounts of capital to flow in, making their currencies attractive to forex traders, explains Dinham. The rand was ranked the 20th most traded currency in 2016, with daily trades accounting for 1% of the global daily currency trading market, according to the triennial survey (pdf) by the Bank for International Settlements.

The factors behind this new optimism are similar to those that drove the 2015 drop: Zuma's cabinet shuffle signaled political instability, there was a drought across the east of the country and China’s devaluation of the yuan took a number of developing country currencies down with it.

For the immediate future, it seems South Africa’s currency may remain strong. In a global economy, however, there’s only so much a country can do to control its strands in a wobbly web of international markets.