FOREX Africa: How Low Will The Rand Go?

By Jeffrey Cavanaugh AFKI Original Published: September 26, 2014, 2:18 pm

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

The Rand takes another nosedive

In the past month the South African rand has taken a beating, falling from the relatively steady 11-10.50 ZAR to the dollar range it had been trading in all summer to around 11.20 ZAR to the dollar as September comes to a close.

This is bad news for those hoping that South Africa might be able to shrug off currency woes affecting countries further north.  After all, after tumbling to a similar level in January the rand recovered and had looked to be maintaining a steady trading range until very recently.  What happened?

Look no further than the forces that have pushed countries like Ghana to ask for IMF assistance:  a continuing low global appetite for commodities.  On September 8, China reported that its imports of iron ore and coal dropped sharply in August from the month prior even as prices for those commodities dropped to multi-year lows.

For better or worse, China just doesn’t seem to be the demand powerhouse it once was — and in typical boom-bust fashion the supply capacity built up during the boom years of China’s break-neck development is producing more than the current market can absorb.

While this is good news for global consumers of those commodities, the knock-on effect that a slackening Chinese demand has had on global producers of the stuff has been dramatic.  This is especially the case in Africa where Beijing and its massive parastatals have become huge economic forces as growth propelled China into Africa in search of natural resources.

The problem for Africa, which has ridden high on the backs of this commodity demand, is that their rising economies are essentially made in China. And with Chinese demand for foreign coal, for instance, dropping 18 percent in one month, the threat is that the rug underneath the African growth narrative is being pulled right out from underneath it.

It’s true that in the long-term Chinese demand will inevitably recover and once again prove ravenous, but Africa and its economies live, like everyone else, in the short run.  Unfortunately for Africa, that short run might extend an awful long time as analysts are predicting that Chinese demand will probably not recover anytime soon.

The reasons being: the imposition of pollution controls and Beijing’s drive to be green, a huge glut in housing that has built empty cities in places no one wants to live, and the continuing mediocre growth in Western consumer markets that has put downward pressure on China’s export-orientated manufacturers.

It could thus take quite some time for these headwinds to dissipate, making Africa’s commodity-dependent, export economies extremely vulnerable in the meantime to currency risk and speculative attacks.

The simple fact is that unless countries are running a current account surplus through trade or foreign direct investment, hard currency will be leaving the country at a faster pace than it is being put in—eventually forcing governments to act by devaluing their overvalued currencies or go begging for assistance from the IMF and other sources of sovereign finance.  This is inevitable, and already we are seeing this play out in Africa’s more vulnerable economies.

So what does this mean for the rand? Well, unless global growth picks back up again—meaning the Chinese start buying up whatever Africa has to sell —then South Africa is just as vulnerable as the rest.

True, it’s more industrialized economy means it has a bigger buffer against a commodity downturn and more maneuvering room as a result, but it can’t as of yet rely on that sector indefinitely.

Nor can South Africa hope that domestic demand will pull it out of any potential slump as much of the country’s labor unrest in past months and years has been due precisely because the country’s large black working class is being stretched thin as never before. They, like their compatriots elsewhere in the world, can’t spend more until they start making more.

So, until this situation changes look for the rand, like Africa’s other currencies, to continue to see their downward slide in valuation vis-à-vis harder currencies like the dollar and the Euro.  South Africa may be able to keep the rand propped up longer than most, but the forces impacting the rest of the continent are simply too big and too strong for Africa’s second-largest economy to stave off for long.

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider and Mint Press News.

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