Why the rand isn’t doing as badly as you think it is

With a stay on South Africa’s slide to junk status, economists are hoping that government can do what needs to be done to push the country in a more positive economic direction – and that the reprieve will stabalise the currency.

On Friday, ratings firm S&P Global took the decision to hold South Africa’s credit rating at one notch above junk, giving government and business some breathing room. However, the group’s outlook remains negative, with a warning that a downgrade could come later this year.

The announcement had a big impact on the rand, which showed a strong recovery following weeks of turbulence, battered around by the junk threat as well as global market influences.

The rand has had a tough year, and has become one of the most volatile emerging market currencies in the world. Economists are not optimistic about the currency, but can’t pin it down – with some saying it will only get weaker in the months to come.

This has massive implications for South African businesses – but how bad is the situation, really?

According to chief strategist at Citadel, Dr Adrian Saville, while businesses primarily base decisions on microeconomic risks – such as operational risks – macroeconomic risks, such as currency fluctuations are far more daunting.

“The principal risk all business face is macroeconomic risk. In turn, this helps emphasise the importance of currency to businesses in all geographies – but especially those that are based in small, open economies that are vulnerable to currency fluctuations,” Saville said.

South Africa is one such economy, he said, where a developed and highly active financial sector helps the country punch well above its weight in currency markets – it is the world’s 33rd largest economy, yet the rand is the 18th most traded currency.

Despite this, rather than being seduced by emotion which clouds judgement, Saville said, the rand remains the country’s biggest business risk, and the state of the currency needs to be placed in an objective context.

To do this, the chief strategist looked how South Africa ranked in 10 indices across three different currency drivers. The resulting assessment is outlines in the table below:

External Reliance & Dependency Management & Vulnerability Absorptive Capability
Economic Openness
[47/185]
Government Budget Deficit
[129/191]
Import Cover (Reserves)
[81/177]
Commodity Reliance
[60/179]
Money Supply Growth
[37/158]
Short-Term Debt Cover
[83/108]
Government Debt-to-GDP
[30/72]
Structural Growth Rate
[121/195]
Minimum Reserves
[75/114]
Current Account Deficit
[106/187]

External reliance and dependency

“Ideally, one wants an economy that is both open and competitive, without being overly dependent on commodity exports,” Saville said. “In this instance, South Africa fairs modestly in most regards.”

Managements and vulnerability

“South Africa is making some significant, but not fatal, policy missteps,” Saville said. “The efficiency of expenditure is not optimal, resulting in inadequate infrastructure capacity to fuel the growth that the country requires.”

Absorptive capability

“South Africa’s absorptive capacity scores modestly, which is concerning given the size and liquidity of the rand currency market,” Saville said. “With a three-month rule of thumb for import cover (foreign reserves/imports), South Africa’s cover is four months.”

“Taking South Africa’s relative position for each metric into account, we found that the country is ranked in the 49.9 percentile across all the countries. The inference from this is that, while much needs to be done to bolster the structure and stature of the South African rand, the currency enjoys a structural strength that could be conveniently described as ‘halfway there’,” Saville said.

“Although South Africa is vulnerable in some areas, the results of our analysis on the rand suggest that this is by no means the picture of a country – or currency – that is in the business of falling over.”

“South Africa is doing what it has done for decades: it is muddling along, escaping disaster but avoiding a miracle.”

More on the rand

Rand targets R15 vs US dollar after credit rating decision

Rand on edge as South Africa awaits junk verdict

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Why the rand isn’t doing as badly as you think it is