page the history of the rand 1 the rand in 2001 5 the rand

Part B: The performance of the rand

Index

Page

The history of the rand 1

The rand in 2001 5

The rand against the dollar compared to other currencies 7

The rand against the euro 13

Table of graphs, charts, diagrams and tables contained in Part B

Title Page

Long term chart of USD-ZAR 1

Exchange rate of the rand against the US dollar during 2001 5

Rand/Dollar exchange rate from July 2001 6

Currencies against the US Dollar 8

Exchange rates of countries (BBB rated) against the US dollar 9

Exchange rates of various countries against the US dollar 9

The rand and emerging markets: from 1999 10

The rand and emerging markets: from 2001 11

The rand and commodity majors: from 2001 12

The rand and commodity majors II: from 2001 12

Exchange rate rand / US dollar vs rand / euro 14

The rand and the euro: undervalued 15

Commission of Inquiry into the rapid depreciation of the exchange rate of the rand and related matters: Final Report dated 30 June 2002

1

B The performance of the rand

The history of the rand

1

1.1 In the long term, the rand has moved in one general movement in

favour of weakness as against the US dollar.1

Chart 1 Expert bundle 452

CHART 1

LONG TERM CHART OF USD-ZAR

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1 Glynos Expert bundle 423


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1.2 The general experience during the past twenty years with the

floating exchange rate system, specifically with regard to the

fluctuation in the exchange rate, was the following:

- The exchange rate often fluctuated quite a lot over the short

term, but followed a more rational path over the long term.

- The depreciation process never followed a smooth path and

has been described as a “staircase” adjustment process, with a

periodic run down a flight of stairs to a new level. The

exchange rate of the rand against the US dollar tended to

remain relatively stable for periods of up to two years, to be

followed by a rather steep downward adjustment over a short

period of time to a new (lower) level.

- In the circumstances, markets at times over-reacted. Market

interest rates rose to extremely high levels, and the rand

depreciated by more than the inflation differential – hence the

need for a period of consolidation and stabilisation after every

sharp depreciation of the rand.2

Highlights of the performance of the rand before 2001 were:-

1.2.1 Most of the rand’s history incorporated a dual exchange

rate system. The financial rand acted as a shock absorber 2 Stals Expert bundle 170, 171


3

for the commercial rand traded at a significant discount of

between 15% and 55% to the commercial rand over the

thirty years that this mechanism was in place.

1.2.2 On different occasions during the 1970’s the commercial

rand was fixed to the US dollar or to the British pound and

fluctuated in line with the value of these currencies. In

September 1975, specifically, government devalued the

rand against the pound by 18%.

1.2.3 In the late 1970’s the commercial rand was allowed to float

freely against all currencies and in 1980 hit its highest

level ever of USD1.35 to the rand.

1.2.4 During the debt standstill crisis in the 1980’s both the

commercial and financial rands plummeted, with the rand

losing over 30% of its real trade weighted value in a matter

of months. The only comparable decline of such

magnitude in the real effective exchange rate of the rand

was witnessed in November and December 2001.

1.2.5 For a period of eleven months after the abolition of the

dual exchange rate system on 10 March 1995 the unified

rand was stable at around R 3.60 to the US dollar.


4

1.2.6 1996 marked a “sell-off” of the rand with the rand losing

20% of its value reaching R 4.50 against the US dollar by

June 1996.

1.2.7 Around September/October 1997, the world witnessed the

start of the so-called Asian crisis. The contagion arising

from this crisis hit all emerging markets in May 1998 and

the rand was materially affected, as with currencies of

many other developing countries.

1.2.8 Having declined by over 20% in real terms in 1998, the

rand regained some of its composure through 1999, trading

in a broad band between R 5.50 and R 6.40 to the US

dollar during that year.

1.2.9 The long slide in the rand began with the rand trading at R

6.12 at the turn of the new millennium.3

1.3 Over the twenty-one month period from the beginning of 2000 to

11 September 2001 the rand maintained an almost consistent and

fairly well-defined declining trend against the US dollar.

3 Jammine Expert bundle 297 – 300, 303, 304, 307- 312


5

The rand in 2001

2

2.1 The decline of the rand is illustrated in the graph below, which

shows the exchange rate of the rand against the US dollar during

the year 2001:

Graph 9 Bundle SARB (07) 65

G9 - Exchange rate of the rand

Exchange rate of the rand against the US dollar during 2001

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SA rands

Graph 9

The extent of the pace of depreciation of the rand during the period July

2001 to December 2001 is illustrated in the graph below. The term “big

figure” is used to refer to the figure before the decimal, i.e. from R 8.00


6

to R 9.00. These “big figure” movements represent declines of

approximately 12.5%, 11% and 40% respectively.4

Diagram 15 Expert bundle 125(a)

2.2 During the year 2001, the rand recorded the following exchange

rates against the US dollar during the year:

- moving from around R 7.605 to the US dollar at the beginning

of the year, the rand depreciated to over R 8.00 for the first

time ever during the second quarter;6

4 Gouws Record 129, 130 5 Mboweni Bundle SARB (07) 283 6 Jammine Expert bundle 317


7

- the pace of depreciation increased with the rand R 8.52 to the

US dollar on 11 September, R 9.03 at the end of September

and R 9.44 at the end of October;

- by the end of November 2001 the rand had fallen to R 10.27

to the US dollar;7

- the rapid depreciation reached its crescendo with the rand

hitting a new all-time low of R 13.84 to the US dollar on 21

December 2001;8

- for the period 1 January to 31 August 2001 the rand

depreciated by 10.7% or an average of 1.3% per month, while

from 1 September to 31 December 2001, the rand weakened

by 42% - an average of 10.5% per month.9

The rand against the dollar compared to other currencies

3

3.1 The weakness of the rand against the US dollar during 2001

compared to other comparable countries is illustrated in the

7 Jammine Expert bundle 336 8 Mboweni Bundle SARB (07) 30 9 See Part K § 8


8

diagram below, indicating that South Africa had become, towards

the end of 2001, somewhat of a special case10:

Diagram 5 Expert bundle 120

The graphs below show the rand’s performance relative to the exchange rates

of similarly rated countries and against those of other emerging-market

economies, the thick red line indicating the South African rand:

10 Gouws Expert Bundle 114

MSchouwstra

Diagram 5 Expert bundle 120


9

Graphs 11& 12 Bundle SARB (07) 68-69

G11 - Exchange rates of countries

Exchange rates of countries (BBB rated) against the US dollar

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Indices: 2000-01-01=100

Egypt South Africa Tunisia Croatia Estonia Hungary Latvia

2001-09-11

Graph 11

G12 – Exchange rates of various

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Brazil Poland Hungary Czech SA

2001-09-11

Graph 12

MSchouwstra

Graphs 11& 12 Bundle SARB (07) 68-69


10

3.2 If one measures the rand against four other emerging market

currencies: the Brazilian real, the Korean won, the Polish zloty

and the Mexican peso, one finds that from 1999 until late 2001

there was not much difference in the value of the rand and those

currencies, save that the Brazilian real was weaker.

Slide 2, O’Neill Bundle 3

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The Rand & Emerging Markets: From 1999

The Rand & Emerging Markets: The Rand & Emerging Markets: From 1999From 1999

Index 1/1/99 = 100

$/BRL

$/ZAR

$/PLN

$/MXN$/KRW

Depreciation

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In 2001 the rand held its own against the Korean won, the Polish

zloty and the Mexican peso until September/October 2001 but


11

then plunged in value. In December 2001 the rand became even

weaker than the Brazilian real.11

Slide 3 O’Neill Bundle 4

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The Rand & Emerging Markets: From 2001

The Rand & Emerging Markets: The Rand & Emerging Markets: From 2001From 2001

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$/BRL

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Depreciation

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3.3 Similarly, until about September/October 2001, the rand

performed as well as other commodity currencies, such as the

Australian dollar, the Canadian dollar, the New Zealand dollar,

the Norwegian krone and the Swedish krone. “[It] was October last

11 Evidence of Dr TJ O’Neill, Global Head of Economic Research, Goldman Sachs, Record 1464


12

year something seemed to happen…which caused the rand to actually

under-perform those commodity majors…relative to the [US] dollar.”12


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J F M A M J J A S O N D J F M A M

The Rand & Commodity Majors I: From 2001

The Rand & Commodity Majors I: The Rand & Commodity Majors I: From 2001From 2001

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AUD/$(inverted)

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Depreciation

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The Rand & Commodity Majors II: The Rand & Commodity Majors II: From 2001From 2001

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Depreciation

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12 Evidence of O’Neill, Record 1467-8


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3.4 Dr O’Neill testified that in his opinion one should not spend too

much time blaming one specific currency for its decline against

the US dollar. In the past three years many currencies weakened

against the US dollar, some of which have had weak growth,

some had very strong growth, some had current account

surpluses, some had current account deficits, and so on. Generally

speaking, until late 2001 there was nothing that interesting from

an international perspective about the rand’s weakness. Given

that other important currencies also weakened against the US

dollar, there was not much that South Africa could do about it

because it had nothing to do with South Africa.13

The rand against the euro

4

4.1 The performance of the rand is usually illustrated against the US

dollar. Although the rand/euro exchange rate was no worse in

early September 2000 than it had been when the euro was

introduced, between September 2000 and November 2000, the

rand suddenly began declining against all currencies, especially



14

the euro. This was at a time when the euro began strengthening

against the US dollar.14 This is illustrated in the graph below:

Chart 20 Expert bundle 369

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EXCHANGE RATE RAND / US DOLLARvs RAND / EURO

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R/Euro

4.2 Goldman Sachs adopts a methodology to estimate the fair value

of an exchange rate. Fair value is defined as the inflation adjusted

exchange rate (often called purchasing power parity (PPP)) which

is then adjusted for relative productivity. Conceptually, a country

with stronger productivity should see its real currency appreciate

relative to other currencies and a country with weak productivity

should see its currency depreciate. Until late 2001, according to

14 Jammine Expert bundle 316


15

the fair value model, the Euro was more undervalued than the

rand.

Slide 8, O’Neill Bundle 9

The Rand & The Euro: Undervalued

The Rand & The Euro: The Rand & The Euro: UndervaluedUndervalued

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4.3 It may be that as Europe is a major trading partner of South

Africa, the euro’s persistent weakness relative to fair value has

contributed to the rand’s weakness. 15


page the history of the rand 1 the rand in 2001 5 the rand

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