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Seth Rotherham
  • Six Reasons Why The Rand Has Bombed

    13 Aug 2018 by Carrie in Business, Economics, Finance, Lifestyle, Money, South Africa
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    The slide in the rand over the weekend caused a lot of folks to panic.

    BusinessTech reports that analysts looked at the current state of the country to try and determine the reasons for the decline, blaming local politics and South African failures.

    According to Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions, while it’s easy to look in-house for the cause of the problem, the real reasons for the decline aren’t that simple:

    “Emerging markets as a whole have suffered severe blows due to the sell-off of riskier assets by investors, and there are many factors contributing to this sell-off,” she said.

    Here are the six main reasons for the rand’s decline:

    Global Trade War

    Remember when Donald Trump said that he wanted a trade war? Well, he got one, and it’s affecting us all.

    Initially starting as a spat between China and the US, this is now a full blown trade war filled with retaliation in terms of tariffs from countries across the globe.

    Turkey – a key player in the emerging market sector – is the latest target with US President Donald Trump doubling tariffs on Turkish steel and aluminium imports.

    “Import tariffs and protectionist policies eliminate free trading environments and cause uncertainty sending investors scurrying to safe havens. But there is more to it than just the restriction on trade,” Botes said.

    On Friday, the lira in Turkey plummeted by over 18%, bringing its 2018 losses close to 40%. Turkey is now accusing the United States of economic warfare. Which brings us to…

    The Turkey Effect

    While emerging markets all operate individually, they remain interconnected by classification, a sell-off in one emerging market spills over into other emerging market countries that offer liquidity, such as South Africa.

    “So it’s au revoir to emerging market currencies as this sell-off dumps currency back into the market, diminishing its demand and therefore the price,” said Botes.

    Foreign Interest Rate Hikes

    To put it simply, like most developing countries, South Africa has debt. As interest rates rise, so does the debt.

    Looking at debt levels – Turkey owes around 70% of its GDP in dollar and euro-denominated debt, South Africa owes around 40% and Russia some 30%.

    “One can quickly grasp the impact of rising foreign interest rates, especially in the US and Europe,” said Botes.

    “As these two regions move away from the quantitative easing state prevailing since the Global Financial Crisis and raise interest rates, foreign denominated loans become harder and harder to service, especially by economies under pressure,” she said.

    Here’s a chart documenting the dollar to rand fluctuation over the past month:

    Poor Economic Recovery

    Basically, South Africa has been the victim of slow economic growth, debt, and poverty. All of these things contribute to the decline of the rand.

    China Slows Production

    China has slowed down on manufacturing because of trade wars (again – thanks Donnie).

    As China consumes over 50% of the world’s hard commodities, one can see how a commodity driven country such as South Africa can feel the pinch when this number starts to decline.

    “Over the past two years a slowdown in economic growth in China, coupled with a deceleration in production gradually, inexorably cuts off the oxygen to commodity-driven markets,” Botes said.

    Being Part of a System

    So while what happens in South Africa definitely has an impact on the rand, it’s important to note that we are part of a global economy. Which means that when Trump declares a trade war or Turkey goes to hell, it creates a ripple effect that unfortunately also impacts us.

    At 1PM today, the rand was trading at:

    • R14,47 to the US Dollar
    • R18,45 to the Pound
    • R16,46 to the Euro

    You’d have to find yourself an optimist to find somebody who sees a rapid recovery in the weeks and months to come.

    [source:businesstech]

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