South Africa, though not the largest economy among emerging markets, enjoys a prominent position among its peers, and the highly liquid nature of the South African rand has encouraged global investors to use it as a proxy for global growth, commodities, and emerging markets. According to statistics issued by the Bank for International Settlements, the rand was the 18th most traded currency in the world, by value, in 2019, despite the economy ranking only as the 43rd largest.
Bianca Botes, Director at Foreign Exchange Experts Citadel Global, comments on South Arica’s commodity currency in comparison with other emerging market countries and elaborates on the fundamental need to develop hedging strategies to mitigate risk within those markets.
SOUTH AFRICA IS CONSIDERED THE “GOLDEN CHILD” AMONG BRICS NATIONS
South Africa gained notoriety among emerging markets thanks to its democratically based political system, a sophisticated and world-class financial and banking sector, and its wealth in both hard and soft commodities. Its geographical location also positions it advantageously as the gateway to Africa where it is considered the most developed country.
“There is a clear correlation between the performance of the rand and the commodity cycle, making the rand a commodity-driven currency. When commodity prices increase, the rand gains significant support, as we have witnessed this year during the so-called ‘super-cycle’,” explains Botes. “When global growth accelerates, the appetite for commodities experiences a concomitant increase, driving up their price and providing a positive surge to emerging markets, which tend to rely greatly on exporting commodities,” she adds.
This in turn has a positive effect on the emerging market’s financial assets, including the underlying currency, and is one of the reasons that the rand acts as a proxy for emerging market exposure and is so strongly traded.
MONETARY POLICIES FROM CENTRAL BANKS CAN ROCK EMERGING MARKETS
One must bear in mind that sustained higher commodity prices can lead to higher inflation, which triggers tighter monetary policies from central banks, which could impact negatively on emerging markets over the longer term. The global market environment functions in cycles and it is important to be able to identify market movements.
“During the pandemic, there was a surge in demand for soft commodities and South Africa’s agricultural sector performed particularly well during the 2020/21 season. Exceptional harvests were recorded for major field crops, horticulture, and the wine industry, far surpassing those of the 2019/20 period. This is bound to result in a strong growth in exports which should rise to well over the 2020 level of US$10.2 billion. This has made South Africa one of the best performing economies among emerging markets in 2021,” says Botes.
If South Africa is to remain a major supplier of soft commodities to the rest of the world in light of continuous food scarcity, the South African agricultural sector needs to be promoted and stimulated.
“In terms of hard commodities, the picture is somewhat less rosy, though the prospects are beginning to look more promising,” says Botes, explaining that lockdown regulations and supply chain disruptions brought many local mines to a complete standstill.
Fortunately, demand by trade partners for commodities is growing strongly, particularly regarding infrastructure development. Economies are re-opening in the wake of the pandemic, and this has boosted the mining sector and produced impressive results to date in 2021, boding well for the remainder of the year.
Written by: Bianca Botes, Director at Foreign Exchange Experts, Citadel Global