What a difference a year makes for a bouncing-ball currency
The rand has been around and about lately, but early on Friday it was back at R14.20 to the dollar — a far cry from the R19 at which it cratered little more than a year ago, as global markets went into Covid-crisis mode. So why is the rand looking so strong? It tends to extremes because it is such a large, liquid currency and often a proxy for other emerging-market currencies. It’s been the bestperforming large emerging-market currency this year and even the world’s best-performing currency over the past year. Arguably, its outperformance now is just catch-up on its underperformance in March/April last year, when investors were fleeing risky emerging markets.
But that’s not the whole story. One of the reasons it’s run ahead of other emerging-market currencies is that, for once, we are the best of a bad bunch.
With the US economy powering ahead and the US Federal Reserve mostly signalling lower-forlonger interest rates, global investors have appetite for risk, including emerging-market risk. And SA is a safe haven of sorts, compared with the likes of Turkey or Russia.
In March last year we’d unveiled horrible fiscal numbers and were in the shadow of being junked by Moody’s, but now we are quite boring, with institutions that, if anything, are looking even stronger than before.
More important, the numbers themselves are looking far better than expected. It’s at times like this we are reminded that SA is still a commoditybased economy, and the rand is still perceived as a commodity currency. With the world in a commodities boom, even a possible new supercycle, mining-related taxes have come rolling in, and the main budget deficit for the 2020/2021 year has come in at 11.2% of GDP, way better than October’s worst-case 14.6% projection.
And crucially for the currency, the commodities boom ramped up export revenues while weak growth shrank imports (and boosted corporate savings), which meant that for the first time in decades, SA ran a surplus on the current account of its balance of payments last year — and is expected to run a small one again this year. A current account surplus means SA doesn’t desperately need the financial, capital account inflows on which it’s usually so dependent — and that in itself supports the rand.
This is one big contrast to the 2013 “taper tantrum”, when the currencies of “fragile five” currencies crashed in response to hints from the Fed that it might start to shift from its very loose post-financial-crisis monetary stance as the US economy recovered. Back in 2013, SA and the other fragiles were running current account and fiscal deficits. Now, the fiscal deficit is much wider but the current account is in surplus.
The stronger rand is helping to keep SA’s inflation rate lower for longer, with some now expecting it to stay at or below the midpoint of the target range for years to come — and asking why the Reserve Bank doesn’t cut rates even further. The Bank would surely counter that one reason inflation is so low by historical standards, and that expectations are now so contained, is precisely that it has held the line in recent years.
And while it’s halved short-term rates in response to the Covid crisis, it’s still worrying about an uptick in inflation — especially if global market conditions suddenly turn against emerging markets and yet again cause capital outflows and a currency crash.
The rand is vulnerable to a Fed “tapering”, as well as to the commodities cycle proving not quite as super as expected. And it’s not as if SA’s economic fundamentals are fundamentally any better than they were before, in the absence of structural reforms.
There’s debate, though, about how far SA’s inflation rate is structurally lower than it used to be — and how much the rand still matters for inflation. Depreciation has not “passed through” to higher inflation in the way it used to. One reason might be that South Africans have got used to the rand’s wild gyrations, and know that what goes down may well come up again. After all, the rand is simply back where it was in late 2015, before the Nenegate crisis. It’s been quite a ride since then.