Global Events
and The Rand

Since the Russian invasion of Ukraine global markets have been in a risk-off environment, which invariably caused a flight from – and a negative impact on – emerging markets (EM) currencies like the rand. “This year is no different,” says Paizis. “The Russia/Ukraine conflict isn’t going away. If anything, it looks like it’s escalating, and the increased uncertainty means we’re going to see more risk-off sentiment in the short term.”

November’s US elections could also be significant for the rand. “South Africa has made noises on the world stage about being non-aligned, for example in Russia/Ukraine or Israel/Palestine, and there could be a negative perception in the US about that,” Paizis warns.

Another global risk factor is the Chinese economy. “China recently said they would like to grow their economy by 5%, but they’re not confident that they’ll achieve that,” says Paizis. “A slowdown in China means a smaller market for many of our exports, which are commodities. That doesn’t bode well for South Africa.”

The Red Sea situation, meanwhile, was a missed opportunity that has become a negative for South Africa. “We could have benefited from 40% of shipping traffic being diverted via the Cape, but issues at our ports meant we have not been able to capitalise,” says Paizis. “Now we have higher global prices for goods and services, along with higher fuel prices and slower transport times.”

South Africa’s rand sits in a category of EM currencies – including the Turkish lira, Brazilian Real, and Argentinian peso, among others – that have various political and fiscal issues.

“South Africa is no different,” Paizis says, “and from a global perspective, we are going to be put in that basket. However, what works in South Africa’s favour is that our financial markets work very well. They’re very liquid, and it’s easy for investors to get in and out. That bodes well for the long-term health of the currency and financial markets, but in the short term it means heightened levels of volatility.”

“Volatility” is the keyword there, he says. “Remember, bad news tends to be built into the currency quite quickly, so if there’s a positive spin on any of those global events, the rand could strengthen substantially. When we look at currency models like purchasing power parity, there’s wide consensus that the rand is undervalued. Unfortunately, we know that when it comes to the value of the rand, there’s a big divergence between what the models say and what the markets do.”