{"id":121349,"date":"2016-04-24T12:00:48","date_gmt":"2016-04-24T10:00:48","guid":{"rendered":"http:\/\/businesstech.co.za\/news\/?p=121349"},"modified":"2016-04-22T17:43:00","modified_gmt":"2016-04-22T15:43:00","slug":"why-the-rand-punches-above-the-weight-of-south-africas-economy","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/finance\/121349\/why-the-rand-punches-above-the-weight-of-south-africas-economy\/","title":{"rendered":"Why the rand punches above the weight of South Africa\u2019s economy"},"content":{"rendered":"
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Is the size of the South African economy out of sync with the ranking of the rand as the 18th most traded currency in the world?<\/p>\n

The South African economy is the 33rd biggest in the world, with a gross domestic product<\/a> of US$350 billion in 2014. But its currency, the South African rand (ZAR), is ranked 18th<\/a> when the percentage shares of the average daily turnover of the global foreign exchange market are considered.<\/p>\n

The South African rand has recently experienced an unprecedented level of volatility \u2013 more so than most, if not all, emerging-market currencies. But a greater part of the pain has been self-inflicted.<\/p>\n

The low economic growth outcomes in the recent past, as well as the poor growth outlook and domestic political risk issues have all contributed to<\/a> putting the local currency on the back foot. An example of this played out in South Africa in December 2015, when the country\u2019s finance minister was abruptly fired<\/a> and replaced with an unknown backbencher. Investors lost confidence in the running of the economy, with terrible consequences for the rand, which reached a new low of more than R16\/US$.<\/p>\n

Size of economy vs currency trades<\/h3>\n

But this recent volatility can\u2019t be blamed on the fact that the rand punches above its weight in the foreign exchange market. Other reasons account for this.<\/p>\n

South Africa is not alone. There are many other small economies in the world whose currencies have bigger shares in the global foreign exchange market.<\/p>\n

For example, the Swiss franc is the sixth most important foreign exchange market<\/a> in the world, but the country is ranked as the 20th<\/a> biggest economy. New Zealand is ranked as the 53rd biggest economy<\/a>, but the New Zealand dollar is the tenth biggest foreign exchange market<\/a>.<\/p>\n

On the reverse side, there are a number of countries with big economies whose currencies are traded very little. This is because they don\u2019t have a well-developed financial market. South Africa\u2019s BRICS partners<\/a> Brazil and India have much bigger economies than South Africa, but their foreign exchange markets are smaller.<\/p>\n

The US and Japan, the first and third biggest economies in the world, also have well-developed financial markets. It is therefore no wonder that the US dollar and the Japanese yen are the first and third most traded currencies in the world.<\/p>\n

The Chinese yuan occupies ninth position<\/a> in the ranking of traded currencies, even though it is the second biggest economy in the world. This is due to the fact that its financial markets are relatively underdeveloped.<\/p>\n

This shows that the size of an economy has no role in the tradeability of its currency.<\/p>\n

ZAR foreign exchange market size<\/h3>\n

The ZAR foreign exchange market, like that of any other tradeable asset, is underpinned by demand and supply. These determine its market size.<\/p>\n

There are a number of critical players on both sides. They include:<\/p>\n