The South African Rand

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South Africa

Unfortunately South Africa has been in the news of late for all the wrong reasons. Starting back in December when the countries first black president and iconic leader, Nelson Mandela died aged 95 causing widespread grief. And now the economy is on the brink of a crisis with growing inflation, interest rates unexpectedly being hiked up, the currency has weakened significantly and exports have decreased from November to December by R8.91 billion or 10.3% month on month in 2013.

Between 1948 and 1994 South Africa was led by a white only government, undemocratic apartheid government which bred a separatist racist culture. Treating blacks as second class citizens. Led by Mandela, after 27 years of being in prison, the African National Congress negotiated with the apartheid government to take over the government.

South Africa is Africa’s largest economy and is often seen taking the lead for Africa on the international stage. The economy is driven by its mineral wealth, exporting precious stones and metals around the world. As the world economy has been hit by recession since 2008, the demand for these resources has fallen, and in turn South Africa’s economy has been adversely impacted. Although the economy did have brief flourishes as a consequence of the massive government building programme for the football World Cup in 2010. This was never going to be a sustainable policy and we are now seeing this reflected in unemployment rates remaining around 25%.

So what is happening to the South African Rand

The South African Rand (ZAR) has weakened by over 25% in the last 12 months against the US Dollar from R8.85/$1 to R11.12/$1 today. In the last month alone it has weakened by just under 7%.

Against Sterling it has weakened even more. Within the last 12 months ZAR has fell by almost 32% against to R18.28/£1.

The South African Reserve Bank has tried to stem this decline and flow of money out of the country by raising interest rates for the first time in almost 6 years by 0.5% to 5.5% from 5%.

The main reason given for the Rand sell off has been the US Federal Reserve announcing that it would start tapering its Quantitative Easing policy. The reason this has affected emerging market currencies like ZAR is that yields on traditionally safe assets like government bonds were pushed to record lows over the last 5 years and investors have looked at Emerging Economies, like South African for investment opportunities. This meant that funds which would have remained in “safer” economies moved into countries like South Africa helping to boost and strengthen their currency.

Unfortunately we do not feel that the slide of Rand has stopped yet. Within 6 months we believe that it will hit R12.5/$1 and R20/£1 and interest rates will rise by another 50 basis points to 6%.

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The South African Rand

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