Is The Rand Still A Strong Currency In Africa?

Despite having the second-largest economy in Africa and a wealth of natural resources, South Africa's currency, the rand (ZAR), has been in a nearly 30-year downtrend with some notable peaks and valleys against the U.S. dollar (USD). These have been largely due to seemingly endemic government corruption, frequent electric power outages around the country, a strong USD, and periodic investor uncertainties about emerging markets.[1]

Over the past five years or so, however, the rand has been trading in a relatively stable pattern. But that changed in late 2019 and early 2020 when it began to weaken again as the outbreak of the coronavirus in China—South Africa's largest export market—negatively impacted global trade and put downward pressure on most emerging market currencies, including the rand. As of early 2020, the rand was trading at just above its weakest level against the USD.[2]

History Of The Rand

The rand (ISO code ZAR) was created in 1961, when South Africa was granted its independence from the U.K. It is legal tender in the Common Monetary Area among South Africa, Swaziland, Lesotho, and Namibia, although those three countries also have their own currencies. The nominally independent Bantustans of Bophuthatswana, Ciskei, Transkei and Venda under the former apartheid system also used it.

It gets its name from the WitwatersRand, the ridge upon which Johannesburg, its largest city, is built and where most of the country's gold was found. The rand was worth about 1.40 to the USD at the time of its creation until late in 1971, which has proven to be its highest level ever. Since then it has been on a mostly downward trend.[3]

Beginning Of Rand's Downfall

The rand began to lose value in the 1970s due to high inflation and worldwide sanctions against the country due to the prior government's apartheid policies. The rand continued to weaken in the 1990s over uncertainty about the country's future under black majority rule, then sank to a then record low of about 14 to the USD following a land reform program in neighboring Zimbabwe and the 11 September 2001 terrorist attacks against the U.S.

Repeated Rebounds Followed By More Weakening

The rand began to rebound over the next several years, climbing to about 6 to the USD by 2005, but that was followed by another slump, as the rand fell back to about 7.5-8 to the USD in late 2009.[4] That was largely caused by several factors, not least of which was the global financial crisis, which led to investor flight to safe haven countries and away from riskier emerging markets, including South Africa. At the same time, inflation in the country soared, and the country's electric utility, Eskom, was unable to meet the country's rapidly growing energy demands.

The rand rebounded again in late 2009, climbing to about 6.5 to the USD in 2011 and 2012, after which it began a steep descent over the next five years, hitting an all-time low of about 17 in early 2016. The drop was largely due to the country's consistent and large trade account deficit with the rest of the world as well as the U.K.'s decision to leave the European Union, which created uncertainty about how that would impact South Africa's economy and trade relations.[3]

Over the next two years, the rand slowly recovered, climbing to about 12 in early 2018. Since then, however, the rand has been in a weakening trend, although over the past two years it has traded in relatively stable band between 13.5 and 15.5, near historical low levels but above the lowest point in 2015-16. The rand ended 2019 at about 15 to the USD, but then began to weaken moderately in early 2020 following the outbreak of the coronavirus in China, the country's biggest export partner, which severely restricted China's trading with most of the world.[2]

ZAR Against African Currencies

The rand has fared better against other African currencies, which may be a fairer comparison than against the USD. This not only because of their shared geographic location but because many countries on the continent face similar problems common to many emerging and frontier economies, namely corruption and investor flightiness.

For example, the rand largely gained against the Nigerian Naira (NGN), rising from 31 to the Naira in early 2018 to about 25 at the end of 2019.[5]

Why Does The Rand Struggle?

Given post-apartheid South Africa's history of corruption and power outages, combined with a strong USD and consistent volatility of all emerging market currencies, it's difficult to see how the rand can find its way back soon to the single digits, a level it has not seen since 2015, although its relatively narrow trading band over the past four years or so is perhaps a positive sign.

Summary

The rand, South Africa's currency, has been in a largely downward trend against the U.S. dollar since it was introduced in 1961 following independence from the U.K. Despite its large size and rich mineral wealth, the country has been hurt by government corruption, a strong USD and investor uncertainties about emerging market economies and currencies.

Past performance is not an indicator of future results.