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The rand is more stable than you think

The rand is more stable than you think

While the day-to-day changes in the value of the rand may seem volatile, research from AlphaWealth shows that, over time, depreciation has been pretty consistent.

Andrew Flavell, wealth manager at AlphaWealth, has tracked the rand’s exhange rates between January 1997 and 2015 and compared its depreciation to two economic indicators, namely the inflation and interest rate differentials.

In 1997, the rand was trading at R4.39 to the dollar and R11.78 to the dollar at the time of Flavell’s calcualtions – a depreciation rate that averaged 5.3% per year.

Since 1997 South Africa’s inflation has averaged 6%. The US inflation has been 2.25% which makes the average differential over the period 3.78%.

According to this theory, the Rand should depreciate at 3.78% annually.

Looking at the interest rate differential, using the ten year bond yield, South Africa has on average been borrowing at 10.1% and the US has been borrowing at 4.05% which means the Rand should have depreciated around 6% to the US dollar each year.

“So the value of the rand should at R9.27 based on the inflation differential and at R13.74 according to the interest rate differential,” Flavell said.

“When we combine the two, the average differential of inflation and the interest rate, the average annual depreciation should be 4.9%. So the Rand should currently be R11.50 but it is currently trading around R11.78 which is only a 2.4% discount.”

Making up the gap

According to Flavell, the discrepency between the real depreciation rate and the theoretical one can be explained by other market influences such as:

  • Capital flows: “Foreigners were buying South African bonds and equities since 2003. This peaked in 2011 and since then, foreigners have been net sellers of South African equities and bonds.”
  • Market sentiment: “Business confidence is low due to power, labour and policy uncertainty.”
  • Poor fundamentals in the local economy: “South Africa’s GDP growth has lagged behind its peers.”
  • Low productivity: “Ideally a country’s output should be 50% or above. South Africa is currently around 45% which indicates weakness in output production.”
  • Credit outlook: “With an unreliable power supply, the imminent ‘strike season’ and widespread corruption, the GDP growth rate may continue to come under pressure.”

According to Flavell, while the rand is currently trading at 2.4% discount, it may be a good idea to take investments offshore.

“Factor in the five reasons for the decline of the currency. If you believe that these issues will be resolved or turned around, then it may not make sense for you to transfer your investments offshore.”

“If, on the other hand, you believe that capital flows are more likely to exit rather than enter the country, that market sentiment will remain depressed, that GDP growth is unlikely, that productivity will remain low – now would be a good time to discuss these issues with your wealth manager and to evaluate offshore investment opportunities,” he said.

More on the rand

SA Rand value: 1994 – 2015

SA rand among most undervalued currencies in the world


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  • Telkom Sucks

    It might not be unstable, but it is very consistent in its devaluation. Imagine us in 10 years time when the Rand is R30 vs the dollar? I’m not one to complain but perhaps our leaders aren’t educated enough to swim in the world financial markets.

    • mark

      Did you not understand the article? Its saying that the rand is almost exactly where it should be? Maybe by luck but not much more can be asked from the currency.

      • MHBGT

        Maybe you didn’t understand his comment… While he did exaggerate the dollar price in 10years at the current depreciation rate (should be just under R20), there’s nothing in the article that says the Rand will stabilize at the current price level against the dollar.

      • Space Chief

        The problem isn’t the instability. It’s the fact that it’s depreciating because of the reasons listed above. Reasons which are going to be difficult to correct. Which means that earning and saving Rands is a detrimental thing when compared to some other currencies where the countries are more stable – ugh the s word – and so the outlook is better. Those of us who earn in Rands, have saved Rands, invest in companies which make their earnings in Rands and own property in SA are all getting screwed by this.

        And the Rand is very volatile too. You don’t see the sort of fluctuations with most other currencies. One day it’s 9.00 to the Dollar, the next it’s 9.40 or something ridiculous.

  • Basil from California

    The last time the Rand was equal to the dollar was in 1982, the good old days R1 = $1
    I believe the Rand is way too weak and is a great investment opportunity (long term).
    I am not buying Rands directly but rather investing in SA companies.
    Sasol LTD and SA Breweries are my biggest investments.
    If SA does it right and takes full advantage of the future development of Africa we could see R1 = $1 again.

    • Space Chief

      Making similar investments in Asia, Eastern Europe and other places will probably net you better returns.

    • Nomad

      dream on

  • Rob Charlton

    Inescapable fact is that the Rand has weakened, and continues to do so. This is an indication of a relatively poorer performing economy and a citizenry that is not benefiting from an increase in wealth.

  • Edward Ingram

    A well written piece. For my own part I would favour ignoring the interest rate differential because that relies upon the market in bonds etc. being bottomless as well as the component parts of interest rates. Over the very long term there should be no lasting effect.

  • Edward Ingram

    A better viewpoint is given in the linked essay on this site which concludes:

    A currency is considered undervalued when its value in foreign exchange is less than it “should” be based on economic conditions. Currency value isn’t determined objectively, however, and may be undervalued due to a lack of demand, even if a country’s economy is strong.

    According to South African economists, South Africa’s economy is not strong, though. The country is currently in an extended phase of slowed economic growth and a widening trade deficit – all the while juggling a power crisis and number of labour-related social issues.

    Long term the balance of trade should determine the exchange rate. I have made proposals to end the influence of other factors. For otherwise how can businesses make a plan? a third of all world output is imported and a third is exported. Two thirds of businesses are not able to make a good plan.

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