How does a weakening rand affect me?

Sore Cloete, Senior Legal Manager at Old Mutual.

Unpacking topical issues and how they impact ordinary South Africans.

What’s in the news?

Over the past week, the rand has weakened against all major currencies, hitting a seven-week low against the dollar on Wednesday, 5 July 2017. Though blame was placed on the ANC’s proposal to nationalise the SA Reserve Bank (SARB), the underlying reason is a global risk-off environment, as markets re-priced expectations of central bank policy.

How is the value of the South African Rand determined?

South Africa has a flexible exchange rate. The value of the rand is determined by the market forces of demand and supply. Similar to a commodity (i.e. a raw material or primary agricultural product), the rand will fluctuate depending on supply and demand, which is determined by what is happening in the market.

What type of factors influence the fluctuation of the currency?

• Demand for a country’s goods and services and other countries’ appetites to trade with South Africa: If more countries are buying South African goods and services and the country is experiencing an increased demand for exports, then the rand could strengthen.
• Local interest and inflation rate: if the interest rate is high, it is likely to attract foreign capital as more interest can be earned on the investment. This demand can then cause the exchange rate to strengthen.
• Demand for emerging market investments: if global investors are feeling more positive about emerging markets, capital flows to South Africa tend to increase, supporting the rand.
• Political instability and poor economic performance: these factors can negatively impact the rand as they reduce investor confidence.

How does the weakening rand impact South Africans?

If the rand is weak, the inflation rate (the rate at which prices for goods and services rise) may rise and, in turn, the price of goods and services will increase. As a result of high inflation rates, the SARB may choose to increase the interest rate to curb consumer spending. A higher interest rate will mean that debt will cost you more. However, some investors will benefit from interest-bearing investments.

On a personal note…

The best way to prepare for currency fluctuations is to build a robust savings cushion. This will act as a buffer in times of uncertainty. Whether it’s a medium term savings fund or shorter term savings plan for emergencies this can act as your “safety net” when you need it most. It is important to stay close to your financial adviser during tough times to ensure that you stick to your financial plan. Digging into longer term savings can often have severe tax implications and negative effects on your long term planning that may impact your financial wellness. Also consider investments – such as balanced funds – that have exposure to offshore assets which should do well when the rand weakens.