From global pariah to emerging-market proxy: the Rand turns 60

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Rand notes.
Rand notes.
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  • The currency became the legal tender as a dual exchange system, replacing the pound sterling. 
  • The currency is accepted even in nations with their own currencies, such as Zimbabwe and Mozambique. 
  • The Rand's status is unlikely to change unless the government changes its currency regime or the economy takes a turn for the worse.

For all of South Africa's economic struggles, the Rand looks set to mark its 60th birthday holding fast as the weather vane of emerging-market confidence.

The currency — once a global pariah — punches above its weight. The latest Bank of International Settlements global foreign-exchange report, released in April 2019, placed the Rand as the 18th most-traded currency in the world, up from 20th in 2016. Daily total turnover for the currency, including spot, forwards, swaps and options, was $72 billion.

"South Africa is one of the successful transformational stories within emerging markets," said Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment in Frankfurt.

The perceived stability of the central bank and economic policies have underpinned its attractiveness as a proxy, he said.

Born on February 1961, the Rand was anything but a lovechild. Following decades of fighting the British, white Afrikaner nationalists voted in a referendum to form a republic, which happened in May 1961. The currency became the legal tender as a dual exchange system — a symbol of Afrikaner nationalism — replacing the pound sterling.

Racial segregation policies sparked boycotts and sanctions from the international community during the country's first three decades, putting pressure on the economy and necessitating a level of control over both the financial and commercial Rand.

The financial variant acted as a shock absorber for the commercial Rand and traded at a significant discount of between 15% and 55% over the thirty years the mechanism was in place.

Political change 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 integrate back into world 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 United States dollar.

Total Rand demand rose 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 financial sectors in New York, London, Zurich, and Singapore," said Liam Hunt, an analyst at GoldIRAGuide.com in New York.

"As one of the only African powers without a history of coup d'états, South Africa is uniquely positioned as a relative beacon of financial stability."

Southern African neighbors Lesotho, Namibia and Eswatini - formerly known as Swaziland - are beholden to developments in their larger neighbor as their exchange rates are pegged to the Rand. The currency is accepted even in nations with their own currencies, such as Zimbabwe and Mozambique.

The Rand has suffered some wobbles. A currency crisis in 1996 stemmed partly from concern the lifting of exchange controls would cause money to leave the country. And in 1998, a slide linked to the Asian debt crisis that battered emerging markets prompted a direct intervention from monetary authorities.

When the currency was pummeled again in 2001 as concern about Argentina's funding problems spread to emerging-market currencies, the South African Reserve Bank decided to stop intervening in the market.

In the latest blow, the Covid-19 pandemic contributed to the Rand's slide to a record 19.0815 per United States dollar in April 2020.

"There are limited controls with free flow of capital as exchange controls only apply to South African residents," said New-York based Julian Koski, chief investment officer at New Age Alpha.

"There is a very liquid spot market with a liquid and well-developed forward market."

The ease of trading the Rand across the world's 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 daily trading was equivalent to 20% of South Africa's gross domestic product, he said.

"It's disproportionately high in comparison to the size of the economy."

The Rand's status is unlikely to change unless the government changes its currency regime or the economy takes a turn for the worse.

South Africa lost its last investment grade rating from Moody's Investors Service in 2020. Moody's rates the nation Ba2, two levels below investment grade with a negative outlook. Fitch has a BB- score, three levels below investment grade, also with a negative outlook.

"If we started to talk single-B rated credit, I think then markets might begin to see that South Africa has got quite high idiosyncratic risk and then perhaps would not be an appropriate representative for EM," Robertson said.

"Neither scenarios are near-term prospects, I'm talking two-to-three-year view. I can't see South Africa losing its status as the most-favored proxy currency for at least this timezone."

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