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Rand drops to new four-year low

by 1st Contact | Jun 05, 2015
  • The Rand devalued severely last week, dropping to a new four-year low amid concerns about the health of the South African economy.
  • 113_rand-drops-to-new-four-year-low

    A speech by President Jacob Zuma, intended to allay concerns about labour unrest, seemed to do just the opposite: the Rand breached the key level of R10 to the Dollar on Thursday, and then tumbled a further 2% against it on Friday.

    According to Andrew Rissik of the Sable Group, there are several possible reasons why the Rand has weakened so drastically.

    There is a shortage of liquidity in the USD space, with individuals and companies wanting to buy more USD than was available. This is a result of various factors, such as:

    • Trade imbalance: Exporters holding onto their Forex reserves. There is no longer a requirement to convert foreign currency back to Rands within a specific period of time. Importers can only hold back payments for goods for so long; eventually they are forced to make international payments for the goods they purchased. Our monthly trading position is very out of balance. The bottom line is that South Africa imports too much and exports too little.
    • Money Market outflows: The US is selling bonds in many emerging markets - including South Africa. And other foreign funds are pulling cash out of South Africa by selling bonds and other liquid money market instruments. There is also talk in the US of reducing quantitative easing (in other words: printing money).
    • Private investment and disinvestment: Foreign private individuals are holding back on investing in South Africa (mainly due to their own economic woes) and many locals are also moving their funds out of the country.
    • Political unrest is causing serious concerns about the South African government - in particular, its lack of economic direction and leadership.

    “The Rand has recovered some of Friday’s losses this week‚ breaking back through the psychological R10.00/$ barrier to once again trade in single digits against the dollar,” says Rissik. “It remains to be seen what the next few weeks bring.”

    According to Rissik, this is a great time for South Africans to bring money held overseas back home to settle any debts. Expats considering investing in the South African property market should also do so now while the Rand is weak.

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