Johannesburg - It took just a hint of strife at Treasury to send the rand tumbling 3.5% in a day - and one statement from the president’s office to bring it right back again three days later.
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Already afflicted by its status as a proxy for other emerging markets’ woes, now South Africa has to contend with a domestic crisis. Together, these drivers have seen the rand overtake the Brazilian real as the most volatile major currency, which is deterring foreign investment. Outflows from stock and bond markets reached R37.8bn since the beginning of November, wiping out the R34.5bn of inflows in the previous 10 months.
“That’s the thing about the rand, it will be used to hedge global investors’ positions in terms of risk aversion,” Ion de Vleeschauwer, chief currency dealer at Bidvest, said by phone from Johannesburg.
“You can enter the hedge quite quickly and you can exit it quite quickly because there is enough liquidity in the market. It’s not for the faint-hearted, this currency.”
Africa's trading restrictions hit rand
The rand’s gyrations underline the perils of maintaining a free-floating exchange rate on a continent where so many countries have restricted trading. That means the rand is often traded where it’s not possible to deal in Nigerian, Ghanian or Kenyan assets, and makes it more susceptible to losses amid the turmoil stalking global markets.
The South African currency has plunged 25% in the past year, weighed down by a slump in commodity prices, slowing growth and the prospect of US rate increases.
Now it’s also victim to investor concerns about who holds the purse strings after President Jacob Zuma fired his finance minister in December. The rand declined 0.09% to R15.6/$ by 07:00 on Friday.
As well as being the most volatile currency among 16 peers tracked by Bloomberg this year, traders expect the out-sized price swings to continue.
Implied three-month volatility overtook the real on February 26 after climbing 310 basis points to 19.15 since the beginning of December. That’s when Zuma appointed an unknown lawmaker to replace the respected Nhlanhla Nene at the finance ministry, only to change his mind under pressure from business leaders and his own party and reinstating Pravin Gordhan, who was finance minister from 2009 to 2014, to the post.
The rand fell the most in four years on February 26 after Business Day reported Gordhan had threatened to resign over a dispute with his tax chief, a Zuma ally. It recovered most of that loss on February 29 when the president issued a statement backing the finance minister, reassuring investors - for now.
“Global risk aversion is still expected to dominate rand trends this year,” Mohammed Nalla, head of strategic research at Nedbank, said in a report on March 1. “But both local and foreign investors are responding far more aggressively to adverse local political developments since December.”
South Africa’s central bank doesn’t intervene in the market or use interest rates to support the rand, unlike its counterparts in Nigeria and Ghana, who have raised borrowing costs and restricted trading to stabilise their currencies - at the price of stifling economic growth in economies already hard- hit by a slump in oil prices.
The rand is the 18th most-traded currency, with a 1.1% share of daily market turnover, according to a 2013 report by the Bank for International Settlements. That makes it the most-traded African currency and comparable with the Brazilian real and the Indian rupee.
While the immediate cost to South Africa of maintaining a floating currency has been higher inflation, in the long run it should support exports and curb imports, stimulating growth, which is set to slow to 0.9% this year, from just 1.3% in 2015, according to government forecasts. Signs of that are already emerging, with export growth estimated at 9.5% last year, according to the National Treasury.
Problem is, the rand’s political premium - it is 7% weaker since December 9 compared with the 0.1% drop in the JPMorgan Emerging Market Currency Index - may drive inflation even higher, eroding the competitive advantage of a weak currency, the Treasury said in the budget review.
Given the high trading volumes and relatively low foreign reserves, the Reserve Bank has little option but to let the currency float, William Jackson, an emerging-market economist at Capital Economics, said by phone from London. “It can be painful in the short term, but I think over the medium term it’s a more efficient solution.”