Why the rand is so weak

The South African rand has broken past R11.00 to the US dollar, and prospects are not looking good for the currency heading to the last quarter of the year.

The rand closed at R11.01 on Friday (12 September), ending the week at its lowest point in recent months, following news that the country’s current account deficit widened to 6.2% – larger than the expected 5.5%.

On Monday, the currency continued to weaken against the greenback, hitting as high as R11.07 in morning trade.

The rand hit its lowest point in more than 5 years back in January, where it hit a low of R11.25 to the dollar amid an emerging market sell off.

Why the rand is weakening

While a bulk of the blame for the rand’s weakening was placed at the feet of the current account’s increased deficit, Efficient Group economist Dawie Roodt, and economist Mike Schüssler provided further insight into the decline – and why it’s likely to get worse.

According to Roodt, the problem for the rand is two-fold, with both local and international factors impacting its performance.

In the US, tapering tends to support the US dollar at the expense of the emerging market currencies, while, domestically, South Africa does not have sufficient local savings to pay off its deficits, and is thus dependent on foreign savings to close the gap.

“The ‘reasons’ for our lack of savings eventually has to do with structural issues like a collapsing state and labour legislation, and that sort of thing then leads to weak GDP growth,” Roodt said.

The South African economy was hard-hit by an extended platinum mine worker strike in the first half of the year, which was followed by further labour unrest in the gold and metal sectors.

The wider economic impact of these strikes, as well as further pressure on consumers across the country, had economists warning of a possible recession, which was narrowly avoided.

For Schüssler, the fundamental drive behind the rand’s weakness is simply that as a country, South Africa is selling less than it is buying.

“Our exports are under pressure as both commodity prices have fallen, and strike action has meant that we had even less than normal to sell.”

“We are growing at 1% while our deficit is 6%. We are seen as a fragile country that relies on huge inflows of money to fund this deficit,” Schüssler said.

Fixing the broken rand

According to the economists, there is no easy fix for the situation – with changes in policy, leadership and productivity needed for the rand to recover.

“We need to address our structural issues like state efficiency, macroeconomic policies and so on. Unfortunately for that we need strong political leadership – and perhaps that is the problem,” Roodt said.

In order to narrow the account deficits, the country would need to become more productive and sell more, Schüssler said.

This would mean less strike action, selling commodities at higher prices, or alternatively, buying less from other countries – particularly electronics and medicine.

This, of course, would need more power and more effective ICT, Schüssler said – two aspects which are not currently strong points in the country.

“We could also ask the IMF for help, but we are scared of this and they could impose harder rules on our budget,” Schüssler said.

Where to for the rand?

Roodt and Schüssler are of the view that the rand could stay around its current levels for a while, settling at around R11.50 by the end of the year.

However, a rating downgrade – which may be likely – could see the rand buckle to R13.00 to the dollar, which coupled with a rates increase in the US, could see it pushed even further to R14 or worse.

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Why the rand is so weak