Rand Dips Post-Employment Data

Impact of US Monetary Policy on Rand

The relationship between US monetary policy and the value of the South African rand is a notable example of how international financial mechanisms can influence national economies, especially those classified as emerging markets. When the United States Federal Reserve adjusts interest rates, it impacts the global economy, including currencies like the South African rand.

Higher rates in the US may lead to a stronger dollar, as global investors pursue higher returns available from US assets, reducing demand for riskier assets and currencies, including the rand. Conversely, when the Fed lowers interest rates, the dollar may weaken, potentially making the rand and other emerging market currencies more attractive to investors.

The anticipation and reaction to US inflation data also play a role in influencing the rand’s strength against the dollar. High inflation rates in the US often fuel speculation about the Federal Reserve’s next steps—whether tightening monetary policy further by raising interest rates or taking a more relaxed stance. Given the difference in economic scale and stability between the US and South Africa, adjustments or expectations of change in US monetary policy can lead to volatility in the rand’s value.¹

As South Africa’s economy is also influenced by various external and internal factors, including commodity prices and domestic political stability, the interplay with US monetary policy adds another layer of complexity to the economic landscape that the country must navigate.

Domestic Factors Affecting the Rand

Domestic factors significantly affecting the South African rand’s value encompass a variety of economic challenges that the country faces, including electricity supply shortages. Since 2007, South Africa has been grappling with rolling power cuts, exacerbated in recent years to an extent of up to 9 hours daily.² This energy crisis has hindered economic growth and increased operating costs for businesses reliant on expensive diesel generators, directly impacting the rand’s stability. Such disruptions extend to essential services, further straining societal and economic structures.

Weak structural growth coupled with the ramifications of the COVID-19 pandemic have entrenched socio-economic hindrances, exerting downward pressure on the rand. Despite regaining pre-pandemic GDP levels, South Africa is yet to recover its employment levels, with substantial job deficits persisting. The high levels of inequality and poverty, slightly mitigated post-pandemic, continue to pose challenges.

The government’s stretched finances due to increasing social demands risk further undermining the rand, as fiscal sustainability remains precarious. These domestic factors collectively contribute to the currency’s weakening, underscoring the ties between national economic health and currency performance.

Effects of Rand’s Depreciation

The depreciation of the South African rand has been closely linked to various economic repercussions within the nation. A weaker rand makes imports more expensive, leading to an increase in the price of goods and services. This can create inflationary pressures, making it more expensive for South African consumers to buy foreign products. For a country that relies significantly on imports for essentials like oil, machinery, and electronics, a decline in the rand’s value can increase the cost of living and contribute to a higher overall inflation rate.

The cost-push inflation stemming from expensive imports can strain household budgets and reduce purchasing power, which in turn, dampens consumer spending—a critical component of economic growth.

However, a depreciating rand might benefit exports by making South African goods cheaper and more competitive on the international market. This could provide a boost to domestic producers and manufacturers who export their products, potentially leading to higher export volumes. The benefits to the export sector might not fully offset the broader economic challenges posed by a weaker currency, especially if the production of these exports heavily relies on imported components, thus narrowing profit margins.

While exporters might find opportunities in currency depreciation, the overall balance of trade could suffer if import costs rise significantly. As a result, substantial depreciation can lead to a complex set of economic challenges that require careful navigation by policymakers to safeguard growth and stability.³

1. Aron J, Creamer K, Muellbauer J, Rankin N. Exchange rate pass-through to consumer prices in South Africa: Evidence from micro-data. J Dev Stud. 2014;50(1):165-185.
2. Arnoldi M. Load-shedding a ‘deadly cancer’ that is killing South Africa’s economy, Maimane tells Ramaphosa. Engineering News. August 6, 2022.
3. Mpofu RT. The determinants of exchange rate volatility in South Africa. ERSA Working Paper 604. 2016.