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South African Rand Devaluation

4th January 2016

The South African Rand has fallen to an all-time low against not just the US Dollar but against many of its other counterparts, including the British pound.  The dramatic depreciation of the Rand started at the end of 2010 but the devaluation has aggressively picked up during this past year.  Living in South Africa as an expat means that the purchasing power of your money depreciates as well.  We have to keep in mind that there are two sides to every coin, on the one hand, a devalued Rand means you’ll earn more on the currency exchange deals if you bring in overseas money, such as pensions, overseas income or savings, but on the other hand, whatever you earn from the South Africa’s local economy will be worth less.

A devalued Rand means that all goods and services imported from abroad will become more expensive as the currency weakens.  If you’re an expat working in South Africa and you’re being paid in Rand, then a devalued Rand is something that will affect your purchasing power.

The currency exchange rates are affected by many factors such as inflation, interest rates, economic growth and Central Bank’s monetary policy.  However, the South African Rand, as a commodity currency, has a lot to suffer from lower commodity prices as South Africa economy relies on the sale of commodities.  With China’s economic slowdown and the fact that China is South Africa’s biggest trading partner, a major source of demand, makes the outlook for the South African Rand look even more dire.   A weaker China will affect the demand for South African goods.

Another source of instability for the Rand comes from the US Federal Reserve’s move to normalize interest rates for the first time since the 2008 financial crisis.  In theory this should boost the US dollar against its counterparts.  Based on the market expectation and the financial analyst forecast the US Federal Reserve is expected to raise rates in 2016 at least 4 times, bringing the benchmark interest rate from 0.5% where is currently standing at 1.5% by the end of the year.

A higher US Dollar will make it harder for South Africa to finance its external debt denominated in US Dollar.  Like every other emerging market, South Africa has a big pile of US Dollar denominated debt as after the 2008 financial crisis the US Federal Reserve flooded the market with cheap credit, which made it easier and more attractive for emerging markets like South Africa to finance their economy.

In the past the South African Rand was named as the worst performing currency and it could have kept the title easily this year if it wasn’t for the Brazilian Real, another emerging market currency, which due to political instability has suffered the most this year (if we exclude exotic currencies like Venezuela Bolivar which has lost more than 70% of its value).

Since the market consensus is for the South Africa Rand to remain weaker during 2016, you’ll be exposed to the currency exchange rates and may be forced to take a cut on your local savings.  Moving all of your savings offshore may be the right decision to protect yourself against the Rand volatility and extreme movements.  The South African economy is facing both internal and external challenges and with the broad-based dollar strength it will be harder for an indebted country like South Africa to make ends meet within the next one or two years.   In the end this could force South Africa to seek help from the International Monetary Fund (IMF), at which point the Rand depreciation can take another hit.

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