The South African Rand has sunk to new lows against the strengthening British Pound – its largest drop in over two years.
On Thursday morning, one British pound was worth R20 – the last time South Africa’s currency dropped this low to the pound was back in late June 2016. This was during former president Jacob Zuma’s controversial tenure, which was marred by corruption, nepotism and cabinet reshuffles which wreaked havoc on the rand.
There are many reasons for the rand’s dismal performance of late.
The most disturbing news for South Africans is that the country’s economy has slipped into recession. On Tuesday morning it was revealed that the country’s GDP had contracted by 0.7%, this followed a shocking 2.2% decline in the first quarter of the year.
While the recession has been labelled as ‘technical’, with government assuring the country that figures would be corrected in the third quarter – the rand has been hit especially hard.
The US Dollar smashed through the R15 mark, as South Africa’s currency shuddered. The last time the exchange rate exhibited these disparities was in May 2016.
But the economic recession is just the tip of the financial iceberg which is busy sinking the rand.
International market instability is also to blame for the rand’s weakening. According to Forex Director for Sable International, James Edwards, South Africa is caught up in a whirlwind of financial uneasiness affecting all global emerging markets:
“Basket of economies including Turkey, Argentina, India & Malaysia etc. including SA have been widely sold off. The first two have serious economic problems
The Rand has a liquid market that seems to act as a proxy for EM [emerging market] weakness, manifested by Bond and equity sell-offs, resulting in weakness due to liquidity and demand issues.”
Last month, Turkey’s currency was devastated as a result of ongoing trade wars involving the US and China. Import tariffs imposed on countries have hammered all emerging markets.
While a weakening currency and economic recession are mutually inclusive, blame cannot be put on one specific issue for the rand’s serious wobble.
While links have been made with local political instability, including the hot topic of land expropriation without compensation, the rand’s dip is likely a combination of all contentious issues, both locally and internationally.
Edwards offered his opinion on the currency moving forward, saying:
“There are economists that point to the Rand being oversold, due to some of the above factors, which are not all attributable to SA alone, and therefore we could see a pull back over the coming months, barring any other unforeseen shocks.
A looming issue will be the midterm budget speech and how the finance minister proposes to fund the certain growing fiscal deficit.
It would appear that the Rand will probably weaken further, before it pulls back.”
At the time of publishing:
Pound (GBP) – Rand (ZAR): R19.91
Dollar (USD) – Rand (ZAR): R15.42
Euro (EUR) – Rand (ZAR): 17.92