What does the falling Rand mean for you?
since the Nenegate debacle at the end of last year, South Africa’s plummeting currency has been on the top of everyone’s minds. Even after the appointment of Pravin Gordhan as Finance Minister, an old hand when it comes to steering the country’s finances, investor confidence was just boosted slightly, only increasing the Rand value momentarily before watching it fall further into what now seems like a continued downward spiral.
The volatility of the situation is severe and everyone’s speculating about what is causing this drop in value and what it will mean for the everyday South African.
What contributes to the value of the Rand?
There are two main forces that play a role in the value of any currency. Domestic forces refer to factors at play within the country’s direct control, such as political stability, while international forces describe all the non-local elements that impact the local economy, such as the speculations that international investors make about how the Rand will perform in the future.
For the most part the Rand has been depreciating over the last eight years at least. Over this period, many factors have contributed to the devaluation of our currency.
More recently we have seen the value of the Rand fall quickly and while there are many factors that play a role in this as well, it’s helpful to highlight four prominent contributors:
- One domestic contributor has been the South African government’s spending which has consistently outpaced its revenue, snowballing the amount of debt the country has.
- Another domestic factor recently causing insult to injury is the internal uncertainty caused by issues such as electricity shortages, a struggling manufacturing sector and ongoing recent political shenanigans.
- Internationally, growth in emerging markets such as South Africa has slowed. Simultaneously, growth in developed markets has rocketed. This has caused investors to pull their capital from the developing economies and reinvest it in richer countries instead.
- After prolonged economic growth, China has been on a slow-down. Since they have been the world’s largest consumer of raw materials and commodities, this slow-down has resulted in less demand for commodities – seeing commodity prices plummet as a result. While it is true that the financial sector is the largest contributor to our economy, it is also true that we still rely heavily on commodity exports to help fuel our economy.
Identifying the contributing factors is the simple part, but determining the implications of a Rand that continues to fall is a lot trickier.
Potentially positive consequences of our depreciating currency:
- South Africa has a current account deficit, which means that we import more goods than what we export. Theoretically a weaker Rand should help drive exports, boosting employment in our exporting sectors as well.
- For exporting companies and those with extensive overseas markets the weaker Rand boosts profits, through increased sales. So, if you have invested in AngloGold Ashanti or Naspers shares, for example, you’ll likely be laughing all the way to the bank soon.
- Then there’s international tourism… South Africa has immense natural beauty and is rich in cultural diversity with warm and welcoming citizens. And now international tourists can experience all this at even less cost, encouraging them to stay for longer or bring more people with them (as long as they can navigate the birth certificate regulations).
Possible negative implications of our falling Rand include:
- The stronger the Rand, the lower the cost-to-consumer of all imports. When the Rand drops in value everything from petrol to international holidays and even imported electronics and cars become more expensive.
- While companies with overseas interests may perform well with a weaker Rand, the same cannot be said for companies that focus on the local market. Stuck with elevated costs, these companies will be forced to find novel ways to cut costs while simultaneously encouraging the local, cash-strapped, market to continue spending on their products or services.
While experts have differing forecasts about the effects of the falling Rand on the everyday South African, most of them agree that 2016 will be a bumpy ride. It’s worth considering safeguarding yourself by moving some of your money off shore or investing some of it in companies focused on overseas markets. For now, it is also not a great idea to go on a spending spree. Rather hold on to your cash a little longer and get a more conclusive indication of what the future holds.