It’s not been an easy few years for South Africa’s beleaguered currency. In the face of another economic recession, a credit rating downgrade to junk status and a tumultuous political climate rife with accusations of corruption at the highest levels, the Rand has held up surprisingly well throughout Q1 & Q2 2017.
That could soon change.
Crunch time for the Rand
Since the end of March 2017, the Rand has gained 2.5% against the dollar. This promising seeming rise is thanks to the country’s high yields which are continuing to attract buyers. Over the course of Q2 this year, South Africa’s 10-year government bonds yielded 8.76%, the second highest yield amongst Bloomberg’s tracked developing nations. The picture for Q3, however, is starkly different.
In Q3, predicted returns hit the floor. Current forecasts for the Rand (plus interest rates) suggest that the currency could drop to -2.1%, the fourth lowest on the Bloomberg Index of developing nations, spelling the end of the Rand’s better-than-expected performance.
What’s behind the drop?
The factors behind this anticipated drop are numerous. The delayed impact of South Africa’s political and financial troubles is perhaps the most culpable of issues. As Q2 2017 has drawn to a close, the out-performance of the Rand has slowed almost to a halt, likely precipitating an imminent drop in value.
Another contributing factor is changing international policies affecting the bond market, as Bank of England and European Central Bank policy makers tighten their purse strings, hot on the tail of the Federal Reserve. This global shift will significantly slow the flow of money into South Africa and other emerging markets.
The crash may already be under way. In the last week of June, investors sold R4.5 billion of Rand securities, with more South African bonds dumped than at any time since the US election of Donald Trump triggered an emerging market sell-off in November 2016.
The everyday impact
So what will a plummeting Rand mean for everyday South Africans?
Rising inflation thanks to the increasing cost of imported goods and services could push the South African Reserve Bank to raise interest rates for consumers in a bid to counteract inflation, which risks stalling economic growth further. If the Bank chooses to keep interest rates low, however, inflation could worsen, further devaluing the currency.
Whatever the next step, the one thing consumers can be sure of is that now is the time to learn more about budgeting, tighten their belts, secure their jobs and hold onto their hats (not to mention their purse strings). With an increasingly turbulent economic future ahead, the nation is in for a hairy financial ride, with job losses and a rising cost of living almost certain to feature in the coming months.
Have your household finances been affected by the current recession? Are you sticking to a careful budget to help protect yourself financially in the face of an uncertain economic future? Share your thoughts and strategies with other readers below.