Every three years, the Bank for International Settlements (BIS) releases its Triennial Central Bank Survey report, detailing foreign exchange activity for the passing period. The most recent edition was released last month, so we decided to check in on how the South African Rand (ZAR) has been performing compared to its BRICS peers and the world in general.
When analysing the ZAR’s performance some encouraging facts come to light. After studying this report one can begin to see why South Africa and the Rand, despite persistent political noise and stubborn social problems, have remained attractive for yield-seeking emerging market investors.
How has the Rand performed?
The BIS used the month of April 2016 as the comparison metric vs April 2013 when comparing daily, weekly and monthly averages. The South African Rand contributed to exactly 1% of total foreign exchange turnover in 2016. This figure is down from 1.1% in 2013. While this figure sits higher than our historical share, when we look at our BRICS peers we see that they appear to have grown faster over the same period. Most notable is China’s growth from 0.1% in 2004 to 4% in 2016 – a direct result of the loosening of its exchange controls and the drive to integrate the Yuan globally.
How does the Rand rank in terms of daily volume traded? As you can see, South Africa’s currency is ranked 20th, down from 18th place in the 2013 review. However, with an average of $51 billion in value traded on a daily basis, we still contribute significantly to global measures.
When ranked against other BRICS members, South Africa is just about on a level pegging with Brazil, and comes in marginally below India and Russia. However, this is only one metric. We thought it best to compare currency trading volumes with GDP, stock market size and trade data.
Currency traded vs GDP: South Africa the outlier
When conducting this comparison against our BRICS peers, South Africa came out well above the rest; reporting an activity rate of 16.1%. This means daily ZAR trading accounts for a massive 16% percent of our total annual GDP. This figure is staggering when compared to the group average of 5.6%. So why are we the outlier?
Well, according to the South African Reserve Bank, for the month of August 2016, they recorded daily Rand-based trades totaling R16 billion. This figure is far less than R51 billion average reported by the BIS and confirms the long agreed sentiment that the majority of Rand activity takes place outside the country’s borders – almost 70% to be exact.
This confirms two suspicions that analysts have long had:
- There is a huge amount of Rand-based speculative trading that occurs daily. This has been elevated in recent months due to the numerous risk-on/risk-off views on emerging markets.
- The Rand continues to be viewed as a conduit for investing in Africa. Whether investors are looking to hedge risk or actually hold hard currency, the ZAR remains their first choice in Africa.
ZAR traded vs trade data: Signs of volatility
Here we looked at trading volumes vs annual total trade data (imports + exports) and, once again, we see the same thing. South Africa ranks highest at 31%, well above the group average of 13.9% for reasons similar to those above. This provides evidence that 2016 is lining up to be one of the most volatile currency periods for the Rand in recent history.
ZAR traded vs total stock market cap: Enough liquidity for all
Finally, we compare daily forex trades against the respective countries’ total market cap or the total value of all the stock markets in each country. Here we see South Africa falling in line with our peers and coming in second, behind Russia. The model is promising in that we rank rather well among our BRICs peers, even though our economy is tiny in comparison.
South Africa’s public exchanges are larger than Russia’s and fall only just behind Brazil and India (by about USD 2 billlion). This should be the most important takeaway from the report as investors continue to search for attractive emerging market returns. South Africa has proved that, in terms of liquidity, there should be no concerns when looking at either its national currency or public exchanges.
South African financial markets are some of the best in the world
The strength of the South African financial sector was further supported by the recently released Global Competitiveness Index (GCI). Out of 138 countries the World Economic Forum’s GCI ranked South Africa highly in financial market development (11th), goods market efficiency (28th) and market size (30th). These scores put us in the same category as Sweden, Norway and Switzerland and goes a long way in explaining why the Rand remains an attractive currency to conduct trade in.
This excellence does come with its caveats. Most importantly, from an investor’s point of view, we rank poorly for labour market flexibility (129th). The cries for labour market reform have been long and persistent over the years and some positive change in this regard could enable us to better leverage our position in the global market place away from being a conduit of trade, to being a producer.
Notable too is that the GCI scores us abysmally low in basic education and healthcare, sharing the bottom rungs with the likes of Zimbabwe and Malawi. Our tertiary education is also suffering, a trend that looks set to continue for some time. These factors are all linked, as the more poorly trained a workforce is the more likely it will need its position protected by legislation.
Source Link to BIS report: http://www.bis.org/publ/rpfx16fx.pdf