The South African rand’s value in relation to other currencies is the factor most likely to keep the country’s C-suite awake at night. This was the finding in a recent Grant Thornton survey of business executives. The rand’s volatility is a major impediment to business growth. Sadly, exchange rates are likely to remain what marketers call a “pain point” for the foreseeable future, as this chart and analysis indicate.
While the rand’s steadily declining value may stop some executives in their tracks, other South African business leaders are increasingly seeking out opportunities elsewhere in the world to do business. Politics, meanwhile, is a key factor in influencing the direction and rate of the rand, as President Jacob Zuma’s finance minister shuffle indicated in December. Until there is a shake-up of the country’s political leadership, it seems unlikely that the rand will change course. – Jackie Cameron
By John Maynard*
Perhaps one of the most telling variables of economic performance is the exchange rate. It provides an instant market snapshot or view on a country’s economy and moves almost instantly to any news on a country’s economy (inflation, real interest rates, economic growth, employment numbers, manufacturing – all variables we looked at above), politics, policies.
A strong currency is usually a sign of foreign investor confidence in a country and its economy, a weak or depreciating currency (if not tampered with by governments to keep it devalued) is a sign that investor confidence is dwindling and foreign investors are offloading the local currency and moving money elsewhere.
This is a very simplistic view on what drives currencies (as there are a wide variety of factors that can influence currency movements), but our view remains currency performance is directly linked to economic performance and the confidence foreign investors has in a country and its economy.
From the line graph it is pretty clear that the Rand has been taking a pounding for years, and the biggest blow to the currency in ages came when President Jacob Zuma decided in December 2015, to appoint an absolute nobody as finance minister (possibly to try and push through a nuclear power finance approval or to grant more money to SAA so that their Chairman can pay unknown boutique finance houses massive amounts to do absolutely nothing), instead of keeping well respected Mr Nene in the job.
Markets reacted violently, and President Zuma had no choice but to let now infamous weekend special Van Rooyen go and bring back Pravin Gordhan as finance minister. The President claimed Mr Nene was earmarked for a BRICS bank job. Wonder how that is panning out?
As we mentioned earlier, the currency shows confidence in a country and its economy, and based on the performance of the ZAR in recent years, there is little confidence in South Africa or its economy currently.
* John Maynard is the nom de plume of an independent economist who is obsessed with official statistics – and uses these facts to blast through misleading narrative and propaganda. For more of his unique insights click here.
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