The rand is not an indicator of the strength of South Africa, writes Pierre Heistein.
Why does the value of the rand react more to fraud charges laid against Finance Minister Pravin Gordhan than to burning busses and student protests? It is because the value of the currency does not represent the health of the country but is determined by large-scale financial inflows and outflows.
If money comes in, the rand appreciates. If money goes out, the rand depreciates. In the short term, student protests do not affect the inflow or outflow of investment. In the long-term they may make a difference - investors will consider the political stability, security of assets and availability of skills when deciding to invest or not, but these are not decisions made from one day to the next.
However, in the case of the finance minister, whoever is at the helm of the Treasury has a significant impact on the value of South Africa’s financial markets. This is why when it was reported that charges of fraud were laid against Pravin Gordhan at 10am on Tuesday, the rand dived from R13.93 per dollar to R14.25 per dollar in 30 minutes.
It is both cold-hearted financial mechanics, as well as emotional speculation that cause such a jump.
If Gordhan is forced to step down as a result of the prosecution and is replaced with a minister more malleable to the needs of the presidency, then investors stand to lose a lot of money. Unhinged government spending will increase inflation, devalue the rand, slow growth and reduce returns on investment.
The removal of Gordhan guarantees a credit rating downgrade of South African government debt at the end of the year, causing financial outflows and further depreciation of the rand.
All these mechanics will kick in the day Gordhan loses his post or the government is downgraded. However, the impact on the rand takes place long before these actually happen. Nobody wants to wait for the rand to depreciate before pulling their money out, so they withdraw before it does.
Every time an investment is withdrawn, the rand depreciates a little more, creating a situation where the first to withdraw gets the best value.
There is, therefore, incentive to act as soon as the news is broken rather than to wait for the event to take place.
In situations such as this, it is quite common for investors and speculators to realise that they have overreacted and by the time this article goes to print or in the days that succeed it, the rand may regain some of the value lost on Tuesday.
Role of public
However, by dedicating most of this article to the value of the rand, I fall into a trap all too common when discussing major financial events: obsessing about currency volatility rather than interrogating what is causing it.
The real issue, in this case, is not that the rand lost about 3.5 percent of its value against the dollar in one day - that will make relatively little difference to the well being of the economy or those in it. The issue at hand is that the Minister of Finance - one of the most trusted posts in government - has been accused of fraud by his own government.
Most of us would like to think that this is political power play and that there are no grounds for prosecution. But most of us also do not know all the facts.
The rand is not an indicator of the strength of the country and rather than focus on sporadic fluctuations in a value that, in the short term, does not significantly affect us, we need to direct our attention to the underlying factors playing out in the court case.
The confrontation between President Jacob Zuma and Gordhan has been hanging over South Africa like a bad mood, but rumours and speculation will now be taken to the courts.
While the markets race around like headless chickens trying to guess the fair value of currencies, the formal prosecution of Gordhan will bring investigation and interrogation to the relationship between the state and the Treasury and set an important precedent.
The role of the public is not to fret about figures, but to pay close attention to processes to ensure that these are fair and transparent.
* Pierre Heistein is the instructor of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.
* The views expressed here do not necessarily reflect those of Independent Media.
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