Traders Guide to the South African Rand
Launched as the official currency of South Africa in 1961, the South African Rand’s name originates from the word “Witwatersrand” which is a term in Afrikaans for “white waters ridge” and is referring to a geographical location where gold mining was historically carried out. This area, close to Johannesburg, was one of the world’s largest gold producing areas, thus giving the coinage its name. The symbol R is used to represent the Rand and its Forex currency code is ZAR. At the present time, there are over R1.4 trillion in circulation and around US$60 billion in Rands is traded every day on the South African Forex market. The South African Reserve Bank, which is the country’s central bank, regulates the currency, making monetary policies and issuing bank notes. The Repo Rate is set by the central bank’s MPC (Monetary Policy Committee) during their six yearly meetings. The Monetary Policy Committee uses a flexible system of inflation targeting to adjust the rate of interest based on variations in the country’s CPI. The Rand is not only the currency of South Africa but also of the Common Monetary Area which also comprises Namibia, Lesotho and Swaziland.
A History of the South African Rand
In 1961, the Rand was introduced to the Union of South Africa in the 3 months before the establishment of the Republic of South Africa. This was as a result of a decision in 1956 to move the currency away from the Pounds, Shillings and Pence system that was previously in existence. The Rand replaced the South African Pound as the country’s legal tender and was originally worth US$1.40. In 1982, increasing political pressure and sanctions placed against South Africa because of the apartheid situation caused erosion in the value of the Rand, resulting in the currency breaking above parity with the US Dollar for the first time. Although there was a brief economic recovery between 1986 and 1988, this was only short-lived, and uncertainty due to political unrest in the country during the early 1990s led to further depreciation of the Rand. A dramatic recovery took place in 2001, however the currency has suffered from numerous periods of depreciation and appreciation ever since due to factors such as the worsening current account deficit, global risk aversion, the Eskon electricity crisis and the slow down in the Chinese economy which is South African’s most important export partner.
The South African Economy
South Africa’s economy accounts for almost a quarter of the continent of Africa’s GDP and the country has a upper middle income, diverse economy. The nation faces several problems that negatively impact the economy including poor standards of education, growing public debts, high unemployment rates, inequality in incomes, political mismanagement, crime and unreliable access to electricity, all of which pose challenges to doing business in the country. South Africa’s key economic sectors comprise mining, fisheries and agriculture together with vehicle manufacturing, food processing, textiles and clothing, telecommunications, real estate, retail and wholesale trade, transportation and tourism. The driving force behind the economy has traditionally been mining of diamonds and gold, and the country is still one of the leading mining and mineral processing nations in the world. Despite the fact that the contribution mining makes to the nation’s GDP has fallen over recent years, it still makes up more than half of the country’s exports. Around 10% of the nation’s workers are employed in the agricultural sector, although this industry is suffering from crime, foreign competition and climate change which has caused its contribution to the nation’s economy to drop. South Africa’s manufacturing industry is relatively small with its automotive industry being most important in this sector. South Africa’s tourist industry is also important to the economy, with millions of international visitors arriving every year. South Africa’s main trading partners, apart from other African nations, include the USA, Germany, Japan, China, the UK and Spain. Its major exports include diamonds, corn, fruit, metals, gold, minerals, wool and sugar. The country’s key imports are transportation equipment and machinery, with other important imports including petroleum, chemicals and manufactured goods.
Impacting Factors Upon the South African Economy
Political unrest and other social factors such as local unemployment, crime and insufficient infrastructure have a major impact upon the South African economy and the value of the Rand. These factors all cause foreign investors to lose confidence in the currency, causing them to choose to invest in safe heaven currencies rather than risk volatility. As it is a commodity currency, the Rand is also very reactive to changes in the global pricing of commodities, and any slow down or other financial issues in the economies of the countries with which South Africa has a strong trading partnership, such as China, will have an affect on the value of the currency.