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- The currency became legal tender as a dual exchange system, replacing the British pound.
- The currency is accepted even in countries with their own currencies, such as Zimbabwe and Mozambique.
- The status of the Rand is unlikely to change unless the government changes its monetary regime or the economy worsens.
Despite all of South Africa’s economic struggles, the Rand appears poised to celebrate its 60th anniversary and stands firm as the weather vane of emerging markets confidence.
The currency, once a global outcast, is overweight. The latest global currency report from the Bank for International Settlements, published in April 2019, ranked the Rand as the 18th most traded currency in the world, up from the 20th in 2016. Total daily turnover of the currency, including spot , forwards and swaps and options, was $ 72 billion.
“South Africa is one of the successful transformation stories within emerging markets,” said Sergey Dergachev, senior portfolio manager for emerging markets debt at Union Investment in Frankfurt.
The central bank’s perceived stability and economic policies have bolstered its attractiveness as a proxy, he said.
Born in February 1961, the Rand was anything but a child of love. After decades of fighting the British, white Afrikaner nationalists voted in a referendum to form a republic, which happened in May 1961. The currency became legal tender as a dual exchange system, a symbol of nationalism. Afrikaner, which replaced the British pound.
The policies of racial segregation provoked boycotts and sanctions from the international community during the country’s first three decades, putting pressure on the economy and requiring a level of control over the financial and commercial rand.
The financial variant acted as a buffer for the commercial Rand and was traded at a significant discount of between 15% and 55% during the thirty years that the mechanism was in operation.
The political shift came when Nelson Mandela was released from prison in 1990 and led the African National Congress to victory in the country’s first democratic elections in 1994. This allowed South Africa to slowly re-integrate into the world’s financial systems.
For a period of eleven months after the abolition of the dual exchange rate system in 1995, the unified Rand was stable at around 3.60 per US dollar.
Total demand for rand increased by more than 180% between April 2010 and 2019, according to the BIS report.
“The rise of the Rand in the post-apartheid era has to do with the speculative frenzy in the emerging markets sector driven by the financial sectors of New York, London, Zurich and Singapore,” said Liam Hunt, analyst at GoldIRAGuide. com in New York.
“As one of the only African powers without a history of coups, South Africa is uniquely positioned as a relative beacon of financial stability.”
Africa’s southern neighbors Lesotho, Namibia and Eswatini, formerly known as Swaziland, are indebted to developments in their larger neighbor, as their exchange rates are pegged to the rand. The currency is accepted even in countries with their own currencies, such as Zimbabwe and Mozambique.
The Rand has suffered some wobbles. A currency crisis in 1996 was due in part to concerns that lifting exchange controls would send money out of the country. And in 1998, a fall linked to the Asian debt crisis that hit emerging markets prompted direct intervention by the monetary authorities.
When the currency was hit again in 2001 when concerns about Argentina’s financing problems spread to emerging market currencies, the Reserve Bank of South Africa decided to stop intervening in the market.
In the latest hit, the Covid-19 pandemic contributed to the Rand falling to a record 19.0815 per US dollar in April 2020.
“There are limited controls with free flow of capital, as exchange controls only apply to residents of South Africa,” said Julian Koski, chief investment officer at New Age Alpha, based in New York.
“There is a very liquid spot market with a well-developed and liquid term market.”
The ease of trading the rand across world time zones adds to its appeal, said Charles Robertson, chief global economist at Renaissance Capital in London. Calculations based on the results of the BIS survey showed that daily trade was equivalent to 20% of South Africa’s gross domestic product, he said.
“It is disproportionately high compared to the size of the economy.”
The status of the Rand is unlikely to change unless the government changes its monetary regime or the economy worsens.
South Africa lost its last investment grade rating from Moody’s Investors Service in 2020. Moody’s rates the nation as Ba2, two notches below investment grade with a negative outlook. Fitch has a BB- score, three notches below investment grade, also with a negative outlook.
“If we started talking about single B-rated credit, I think the markets might start to see that South Africa has quite a high idiosyncratic risk and might not be an appropriate proxy for emerging markets,” Robertson said.
“Neither scenario is a short-term perspective, I am talking about a two to three year view. I cannot see South Africa losing its status as the most favored proxy currency at least for this time zone.”
