May has not been kind to the rand. The beleaguered South African currency is down sharply against the US dollar this month, hitting a new record low along the way. In fact, 2023 in its entirety has been unkind to the rand, and it has lost ground against the pound and euro too.
This is not good, but for some perspective consider what happened this month 25 years ago. Indonesian president Suharto was forced to stepped down after 30 years in power on 21 May 1998, as widespread rioting followed a catastrophic currency collapse. Like many East Asian currencies in the 1990s, the rupiah was pegged against the dollar. Across the region, this encouraged lots of cheap but ultimately unsustainable borrowing in dollars. When Thai authorities eventually ran out of hard currency to maintain the peg in July 1997, it triggered a financial crisis that would knock over other countries in the region like dominoes and ultimately destabilise markets as far away as Russia. The Indonesian rupiah lost 80% of its value against the dollar in the 12 months prior to Suharto’s resignation (the already-weak rouble would slump 70% in the following 12 months). Chaos in the financial market spilled over into the streets.
Managed currencies have the great benefit of stability, allowing businesses to make decisions about future cross-border activity with relative ease. But over time, the exchange rate can become unrealistically strong or weak relative to the underlying economic reality. Imbalances build up. The experience in most developing countries is that the currency ends up too strong, encouraging excessive imports and foreign borrowing. Ultimately, the country runs out of the foreign exchange reserves needed to keep the currency pegged, forcing the government to adjust the exchange rate. People wake up one morning to hear that the currency has fallen by 20% or 30% overnight. In the case of Indonesia, the declines were much worse.
Prior to the early 1980s, the rand was also pegged against the pound and later the dollar with the exchange rate determined by the government. The rand was also periodically devalued, for instance in 1975, when it was devalued by 21% over a weekend in September.
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