What the steady indicators really tell us
The past week was the most difficult period I can remember living through as an adult in SA. When a mass of people gathered at Nkandla protesting against the Constitutional Court’s order for the imprisonment of Jacob Zuma, we knew things were about to get difficult. Yet we were unprepared for the dystopian scenes of burning and looting in KwaZulu-Natal and parts of Johannesburg.
Given what we were going through with the latest and most vicious Covid-19 infection wave, last week felt like the final assault on our psyche. It felt unbearable. Yet the rand depreciated only 3.6% against the dollar and retraced those losses into the end of the week. The rand can be volatile at the best of times, yet it ignored the chaos. Why?
SA is experiencing positive terms of trade due to exceptionally high commodity prices. The Commodity Research Bureau’s Industrial Commodity index is up 50% from March 2020 levels, almost to historic highs. This supports domestic exports even as low domestic demand has contained imports. Consequently, the country now has historically large trade and current account surpluses.
The trade balance recorded a surplus of R54.6bn in May compared with a peak monthly trade surplus pre-2020 of R16.7bn. SA is not consuming the dollars it generates. This limits pressure on the rand now and explains why it has been the best-performing emerging market currency post the March 2020 sell-off.
The current G3 (dollar, euro and yen) regime of easy financial conditions is another powerful anchor for the rand. Domestic developments would have to be exceptionally negative to offset this force, especially when paired with the current account surplus. The most recent periods of sustained rand weakness — the 2020 Covid-19 crisis, 2015 commodity collapse, 2013 taper tantrum, 2011 European debt crisis and 2008 global financial crisis — were linked to tightening financial conditions and global financial market stress. A few offshore investors I spoke to as the unrest was unfolding asked if it signalled a political regime change. When the answer was no, they calculated that the carry trade was safe and went back to business as usual.
When then president Jacob Zuma dismissed Nhlanhla Nene in December 2015, the rand fell 8% against the dollar in three days. While not widely discussed, the currency weakened then because the fundamental backdrop was already fragile. Commodity prices were in free-fall, the trade and current accounts were in deep deficit, global financial conditions were tight and financial markets were in distress. Zuma’s decision just made a bad situation worse.
Had last week’s episode of SA self-harm happened when the global environment and domestic balance of payments were less supportive, the currency fallout would have been profoundly negative, and the Reserve Bank would have been forced into procyclical monetary policy tightening, as we saw in early 2016. The economy should be spared that this time around.
Even then, the lives of millions of people have been destroyed, businesses have been looted, infrastructure has been set alight and people have died. Whether the rand weakened or not does not change these facts. When I started working in financial markets in the early 2000s, the old guys would boast that SA’s equity market was the bestperforming globally in dollar terms over multiple decades. This while the country was systemically disenfranchising and impoverishing the majority of its citizens.
I learnt then that financial market indicators are not the barometer of societal success. Commodity-rich economies often harbour deep economic injustices and profound societal failure while boasting high GDP figures, strong currencies and strong equity markets. That the rand has been so resilient in the current unrest is welcomed. However, it also shows how little the underlying architecture of this economy has changed since the apartheid years. That should worry us.