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Why is the Rand so Volatile at the Moment? Part 2

By Bidvest Bank
25-04-2016
Part Two in a Two-part series

In our first article on this topic, we covered various external reasons why the Rand is currently so volatile. This article addresses internal reasons why our South African currency is fluctuating so dramatically, and also provides a few things that you as a consumer can do about it.

1. Rating agencies

Why are the rating agencies such a big deal? There are three of them: Moody’s, the Fitch Group and S&P (Standard & Poor’s), and they’re important because the better the rating they give us, the cheaper it is to borrow money as a country. If they lower our rating, the cost of borrowing for South Africa places a greater strain on the fiscus and hampers the ability to spend on more note-worthy projects that uplift the country.

In June, S&P will make a decision about whether to downgrade South Africa to junk or non-investment status.  Their recent commentary was that they have cut their growth forecasts for us by half a % for 2016 – and this caused the Rand to dip. All ratings agencies take every aspect of a country’s stability into consideration, so the co-operation of industry and the government is paramount.

2. Business confidence

South Africa’s level of business confidence in 2015 hit its lowest annual average since 1993, according to the Business Confidence Index (BCI) of the SA Chamber of Commerce and Industry (Sacci)*. Business confidence is influenced by many things, including the current drought in the country, as well as recent strikes in specific industry sectors, and this in turn affects South Africa’s currency strength.

3. Growth projections

The International Monetary Fund (IMF) cut our growth projections** for this year from 1.3% to 0.7%, lower than they’ve ever predicted for South Africa. 

4. Tax collections

These are getting smaller so the country is bringing in less revenue, but our debt is getting bigger because of the weakening Rand. This is because the weak Rand makes paying interest on foreign loans more expensive and also places a bigger burden on taxpayers.

5. Sentiment

You’ve probably heard phrases recently like, “I need to buy a new car but I’m putting it off until the economy recovers a bit”, or,  “We want to buy our first house but we’re going to wait until the political situation feels more stable.” Everyone is feeling a bit uncertain about South Africa’s future, and it takes a lot of effort and sunny days to change that public sentiment.

So, how do we solve this problem?

While we can’t control many of the issues outlined above, we can start making a difference in the immediate lives and businesses that surround us. Firstly, financial institutions should be encouraging people to start up small businesses. South Africa needs entrepreneurs and we need to find ways to make the process of starting a business easier and within everyone’s reach.

Next, we should all try and support local businesses. We need to stop buying imported goods when the same thing – often of even better quality – can be produced locally. Instead of buying imported avocadoes from Spain, buy naartjies that are grown here and are in season. Try to buy proudly local goods wherever possible in order to help stimulate our economy.

With the Rand fluctuating so much, it can be difficult to plan any overseas trips. Not knowing how much your money can buy you makes it much harder to budget. That’s why the World Currency CardTM is a good option – it lets you pre-load your card with up to 17 currencies at a fixed rate, giving you peace of mind so you can enjoy your trip and create lifelong memories.

*http://www.bdlive.co.za/economy/2016/01/07/latest-bci-reveals-business-confidence-lowest-in-years

** http://www.bdlive.co.za/economy/2016/01/19/imf-cuts-sas-economic-growth-outlook-to-lowest-on-record