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The Value of The Rand

By Bidvest Bank
18-02-2015
“The Rand is so weak at the moment!” 

Most of us are familiar with that South African dinnertime conversation topic. And for many of us, it does seem that as the months and years roll on, it takes more and more Rands to buy those precious few Dollars and Pounds with which to travel overseas. 

But is our currency really in freefall? According to Zelieka Anderson, a Senior Treasury Dealer at Bidvest Bank, the current value of the Rand has actually more to do with what’s going on in the rest of the world than with what’s happening in our own country. 

Of course, says Anderson, the Rand isn’t currently at its fair value due to the spate of recent problems in our country – everything from our energy crisis to the Nkandla scandal – all of which don’t look good to international investors. But there’s more to the story than just negative off-shore sentiment. 

For starters, says Anderson, it’s important to realise that the Rand is a free-floating currency. This means that it’s not pegged against any other currency, and so it gains and loses value according to the market’s determination of its worth. Occasionally the Reserve Bank may intervene and try and stabilise it, but at the moment there’s very much a “hands-off” approach. This is important in order to attract international investors, who want to know that there’s no artificial element to the Rand level. 

The Rand is therefore heavily affected by what’s going on in the global marketplace. More specifically, the current Rand depreciation is due to the fact that the U.S. Federal Bank has “tapered” its monetary policy of quantitative easing. Introduced in the aftermath of the 2008 financial crisis, quantitative easing is where the federal government bought up bonds in order to inject cash into the economy. This policy was implemented because the all-time low interest rates weren’t enough to stimulate the world’s largest economy. 

So what does this mean? When there was an excess of money floating around the U.S. economy, investors needed to put these funds somewhere and earn a yield on them. To do this, they were happy to invest in emerging – and riskier – markets like Turkey, Russia, Brazil and South Africa. Due to quantitative easing being cut however, there’s now less money available and so there’s less investment in emerging markets. This means currencies like the Rand are being sold in favour of Dollars, Euros and Swiss Francs. And with the surplus of a currency comes depreciation, which explains the Rand’s downward movement. 

Over the last six months, the Rand has lost 10% of its value. While this may seem dramatic, when compared with other emerging market economies this figure isn’t actually the worst of the lot. The Russian Ruble, for example, lost 50% of its value over the same time period. In fact, South Africa is only the 13th worst out of the top 20 traded emerging currencies. At the same time, the Euro has lost 6% of its value. Its interest rates have gone to negative 0, 75% and so the Eurozone is also introducing a policy of quantitative easing to get their economy back on its feet. In simple terms, the whole world is in flux and our currency feels the brunt of it.

So what’s ahead for the Rand? Anderson says it’s important that we become a stable economy to be attractive to investors, which means sorting out our employment and energy problems as best we can. It’s also crucial that we keep being an investor-friendly destination. Then, we need exporters to use the current Rand value to their advantage. And finally, we need to work harder to overcome the effects of the 2008 financial crisis and know that eventually we’ll come out intact on the other side. 

If you’re travelling overseas, the Bidvest World Currency Card lets you take advantage of a pre-set exchange rate at the time you load funds onto it. This means that even if the Rand depreciates while you’re away, you won’t lose out.