The dramatic fall of the rand against the dollar, a fortnight ago, was arguably unwarranted. It caused serious panic prompting many to scream in agony that it was now time to take more money out of the country and invest abroad. Too late!
Financially interested folk had their eyes popping and jaws dropping as the rand currency plummeted to a low of R19.52 against the dollar. At the end of March 2023, the rand was hovering around R17.80 and at the close of April it had further weakened to about R18.43.
Market participants attributed the decline to the R19.52 level to fears that trade with the United States, South Africa’s second largest export destination, might be compromised. The worries came amid allegations that South Africa irregularly sold arms to a Russia engaged in war with Ukraine.
People called for South Africa to be pro-Western. Apparently, some individuals are frightened of the United States sanctioning and breaking trade ties with South Africa, a country with the most advanced capital markets on the African continent.
Fears of severed trade ties with US are a scarecrow and a mere spook suitable for those enrolled at play school. Foreign policy is too complicated!
Those advocating for the buying of foreign currency assets now might just discover that the train has long left the station. A capital flight at this stage is too expensive. Using a weak rand to buy expensive American dollars and British sterling would be pennywise and pound foolish.
The South African shares of well-run companies on the Johannesburg Stock Exchange are very attractive with high dividend yields. The high interest rates (albeit a pain to borrowers) point to more reason to save more money rand inside the country.
The recent fall in the rand should not cause unnecessary panic. Currencies fall and rise for several reasons. The rand will recover without the need to change foreign policy. Here is why.
As South Africa’s second largest export destination, the U.S yearns for dominance and influence globally. It would not surrender to China, South Africa’s largest trading partner. Sanctioning South Africa for its non-alignment over the Russian-Ukrainian war, that is almost about to end, would weaken the U.S in Africa.
But this does not mean South Africa should be arrogant and nor should the U.S be a bully. What is required is the sustenance of good international and economic relations between the two.
The question of South Africa’s non-alignment foreign policy has deep embedded roots and the faster critics understand that this is unlikely to change anytime soon, the better. The country has not changed its non-alignment foreign policy even during difficult economic times.
The rand has fallen in the past and it will recover. This is not to sound egotistic and simply think it can be picked up easily like a coin on the floor. But here is the reality.
Those averse to economic history may be unaware that just over 21 years ago, the rand had suffered an unprecedented deterioration of about 50 percent, but later recovered strong and paired all the losses.
Historical data from the South African Reserve Bank shows on 20 December 2001 the rand against the dollar depreciated to just over R13. This was an extraordinary big dive compared to the R7.57 mark against the dollar on the 2nd of January 2001.
At a global political level, the world had been shocked by the tragic terror event at the twin towers on the 9th of September 2001. It was a year of conspiracy theories with some in South Africa arguing the rand had fallen because if manipulation.
The South African Reserve Bank would note that the decline in the rand at the end of 2001 was “not justified by the country’s solid economic fundamentals, including sound fiscal and monetary policies”. The central bank attributed the depreciation at the time to “a problem of perceptions” rather than economic rationale.
However, after almost two years, the rand had clawed-back, reaching R6.65 against the dollar at the end of December 2003.
Could the latest decline a fortnight ago be defined as an exaggerated problem of perceptions?
The first point to make is that South Africa’s recent plummeting is arguably unjustified, bar the difficulties around Eskom, muted economic growth and the increase in interest rates in the U.S.
There could be many other factors that have not been studied. For example nobody is discussing the issue around the offshore investment liberalisation by the finance minister Enoch Godongwana in his February 2022 budget. Business hailed this foreign exchange decision as great, but we are yet to see conclusive studies on what it has meant for the rand.
What helped the rand to recover in 2003 was the progressive management of South Africa’s economy and not a change in foreign policy. In 2023 the country needs all hands-on deck to fix the electricity challenge and manage the economy better.
Not all is lost. South Africa remains alive with possibilities as it continues to inspire new ways, supported by a competitive economy underpinned by attractive investment fundamentals.
South Africa will recover!