The rand has long been one of the world’s most volatile currencies and 2023 was no exception. It has seen major swings against all of the world’s biggest currencies, with the general trend being significantly downward. The local currency has lost eight percent of its total value in the past year.
Take the local currency’s performance against the dollar, for instance. The year started off with the exchange rate at just under R17 to the dollar. It then staged a mini rally, reaching around R16.80 in mid-January. That improvement proved short-lived, however. By mid-year, the rate threatened to breach the R20 mark. By year-end, it was closer to R18.30.
These fluctuations don’t just mean that your next holiday to the US, UK, or Europe will be more expensive either. They have a profound impact on the economy, affecting everything from the price of petrol to the cost of imported goods and services, ultimately driving up inflation. They can also be caused by a wide variety of domestic and international factors, with several major events in 2023 demonstrating how broad a range of factors are at play when it comes to the currency’s performance.
Ongoing interest rate hikes by the US Fed
In a bid to bring down skyrocketing inflation, central banks around the world have steadily raised interest rates over the past couple of years. In general, when interest rates are raised, the value of a currency increases. Higher interest rates attract foreign investors searching for yield, increasing demand for, and the value of, a country’s currency.
Few of those interest rate increases, however, come anywhere near having the same impact as those implemented by the US Federal Reserve. Because the US is the world’s largest economy and the US dollar is the predominant global reserve currency any rise in interest rates tends to have an outsized effect.
Between March 2022 and December 2023, the Federal Reserve raised interest rates 11 times, taking them to a 22-year high. While inflation has cooled enough for a pause on rate hikes, the central bank has warned that further increases may be on the cards in 2024.
The Lady R diplomatic incident
Of course, events that feel far away from the realms of finance can have a significant impact on currency exchange rates. Nowhere was this more vividly illustrated than with the Lady R incident.
While the mysterious docking of the Russian ship in Simonstown harbour drew headlines when it first occurred in December 2022, things kicked off in May this year when the United States ambassador to South Africa, Reuben Brigety accused the country of using the docking to supply Russia with arms for its war in Ukraine. In the wake of the diplomatic spat, which nearly saw South Africa kicked out of trade agreements and threatened with sanctions, the local currency declined from R18.8 to the US dollar on 10 May to R19.3 by 18 May.
Eskom’s worst year was bad for the rand too
Less a single event than an ongoing disaster, load shedding continued to be a millstone around the rand’s neck in 2023. 2023 was Eskom’s worst year for load shedding by some margin. By September, load shedding in 2023 was worse than the previous eight years combined.
Without reliable power, the economy cannot grow, denting investor confidence and the value of the rand along with it. According to at least one piece of analysis, there is a significant correlation between load-shedding stages and the dollar/rand exchange rate. This only adds to the long list of reasons why solutions to load shedding must be found.
Transnet woes add to economic uncertainty
Of course, Eskom isn’t the only state-owned enterprise (SOE) to have contributed to South Africa’s economic woes in 2023. Transnet, the SOE charged with overseeing the country’s rail, port, and oil pipeline infrastructure also had a disastrous year. Most recently, equipment breakdowns at Durban’s port left 71 000 shipping containers stranded at sea while also putting additional pressure on South Africa’s other ports. That’s to say nothing of the long-standing freight rail issues at the SOE which mean that the sight of hundreds of trucks lined up outside the country’s ports is now commonplace.
As is the case with electricity, infrastructure not running smoothly dampens investor confidence, affecting both the economy and the rand. If the currency is to have any hope of recovering to a significant degree in 2024, these issues will need to be resolved. The proposed opening up of South Africa’s ports and rail network to private competition may help in this regard.
Give yourself some protection from rand volatility
Of course, there have been other factors that have shaped the rand in 2023, from political gaffes to geopolitical conflicts on the other side of the world. Whatever the cause, however, it’s important to remember that you can mitigate at least some of that volatility for your own international payments by using an international payments provider that allows currency hedging while prioritising customer service and transparent pricing. Doing so not only ensures that you’ll be able to make payments quickly but also at a lower price than you’d get through a bank or traditional forex provider.