/ 27 July 2009

Ups and downs of volatility

The rand has so far been one of the strongest currencies this year. Last year it was one of the weakest. It is the volatility of the rand, rather than its actual value, that creates economic difficulty for a country trying to create export-led growth.

Daily, commentators talk about events such as the Vodacom and potential MTN deals to explain this sudden demand for rands. They may point to political events such as the well-received appointment of Gill Marcus as Reserve Bank Governor, but the reality is that, barring a major catastrophe, our local events have very little to do with the rand’s movements. These are affected far more by the fact that we have an unusually high level of financial sophistication for an emerging market.

The rand is the most liquid emerging-market currency in the world and among our peers we have the most sophisticated financial system and investment instruments. So the rand has become a proxy for all emerging market currencies. In many ways the South African currency and our bond are the United States dollar and US treasuries of the emerging markets. Except that, in our case, when there is a flight to safety it means selling the most liquid of your riskier investments — SA Inc.

Last year, when investors fled from riskier emerging market assets, they struggled to sell Latvian lat or even the Argentinean peso, so they dumped their rand assets instead. Now that risk appetite has returned — demonstrated by the fact that emerging stockmarkets have outperformed developed markets since the recovery in March — investors are buying up the rand. It is no coincidence that the rand’s recovery bears a direct correlation to the global market recovery.

Then there is the fact that we remain a commodity-driven economy, especially when it comes to exports. Hence, the rand correlates very closely with the prices of commodities — rallying strongly in the first half of 2008 with gold and platinum, only to collapse as resource prices went into free fall.

As commodity prices have recovered, so has our currency.

The stronger resource prices have also played a role in reducing our current account deficit. This in turn is placing less strain on our ability to fund our imports and has therefore reduced the risk of the rand. A more manageable current account deficit means less currency risk.

Ultimately, the volatility of the rand is a result of factors well beyond the influence of our policymakers, so the whole debate about the correct value for the rand is moot.

It is only once South Africa and other emerging markets become more developed and our dependency on metals as an export earner lessens that we will see the rand start to trade in a band more reflective of a mature economy.