ZAR – the lost currency

The poor old ZAR has had a rough time of it in the past decade.

Everyone watched with horror this month as the Rand took another nosedive, breaching never-before-seen levels. At one point in intraday trading, R19/US$ became a reality. The Rand managed to pull back below R19 , but the reality is that the seal has been broken.

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How did you go bankrupt?”
Two ways. Gradually, then suddenly.”

Ernest Hemingway, The Sun Also Rises

The Rand kicked off 2020 at an acceptable level of around R14.20/$. By the beginning of March, global jitters had moved this to R15.50/$.  The SARB reported a weighted closing rate of R18.71/$ on Friday, marking the end of a frightening 5 week period that saw the Rand drop over 20%.

The currency is down 32% for the year.

Interestingly, this is a similar percentage move to that seen during the Global Financial Crisis. Remember when bankers broke the world back in 2007 – 2008?

The lost decade

South Africa emerged from that crisis and welcomed Jacob Zuma as president. Thankfully, FIFA was running the country for the first couple of years of his presidency, so things weren’t too bad at all. In fact, that period will go down as the happiest in recent memory for most South Africans.

When the vuvuzelas stopped blowing, things started to get dicey. Marikana in 2012 marked a period of disbelief for South Africas.

The Rand slowly but surely fell apart, culminating in a 15% shock to the system in December 2015 when Zuma overplayed his hand to try control the nation’s finances once and for all, by firing Nene as Finance Minister. Our “weekend special” Finance Minister debacle, known as Nenegate, ruined many a finance professional’s December holiday that year.

The political winds of change began blowing after that. Two years later, Ramaphosa won the ANC elective conference, lining himself up to take over as president. South Africans had to wait until 2019 to see his inauguration.

Unfortunately, for a multitude of reasons, reform has been slower than the markets hoped for. The Rand slid again, trading between R14 and R15.5 for a year or so, before blowing up thanks to Corona.

We simply never gave ourselves a chance to recover properly from the Global Financial Crisis. We literally wasted an entire up-cycle.

Ramaphosa’s own term for this horrible economic period in South Africa’s history is certainly appropriate. It was the lost decade.

Where she stops, nobody knows

Even without Corona, a decade of poor economic policy and rampant theft cannot be easily overcome. Global economic problems, combined with South Africa’s weak balance sheet (which has far too much debt) and public sector wage commitments, will put us under pressure for an extended period.

The question on everyone’s lips is: Where does the pain end?

Truthfully, nobody actually knows. Anyone who claims otherwise is lying. Currency movements are notoriously difficult to predict with any accuracy.

With that said, it’s possible to at least estimate a rational trading range for a currency.

Although there may be more downside to the Rand, the most rational outcome is that we trade in a range of R17.50 to R19.50 for the next two years or so. After that, we either become Zimbabwe or we recover.

A beacon of hope: local manufacturing

One of the impacts of Coronavirus will be deglobalisation. Supply chains will be coming home, reducing the world’s absolute reliance on China.

South Africa is, ultimately, a stable country. We have proper business frameworks in place and a liquid currency. We have ports, transport infrastructure and a rich set of skills in South Africa. We have natural resources in abundance, a strong agriculture industry and some of the world’s most recognisable tourist destinations.

A weak Rand makes us an attractive option for companies seeking to diversify supply chains away from China. It also means that we might be able to rescue local industries like the textile industry, which has been all but killed by cheap Asian alternatives.

South African entrepreneurs should seek ways to position themselves for a structurally weak Rand. Export businesses have reasonable prospects. Import businesses are going to really struggle, especially imports of durable goods that consumers can choose to do without.

We lost a decade. We lost a currency. We shouldn’t lose all hope.

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