The South African rand has collapsed over the past few decades as the country’s economy stagnated and political uncertainty scared away investors.

In the 1970s, a rand was more valuable than a dollar, meaning you could get a dollar for only 70 South African cents.

However, this changed in the mid-1980s as political uncertainty and international sanctions began to severely affect the value of the local currency.

Moreover, efforts to keep the rand artificially trading stronger than the dollar began to falter, and the local currency rapidly weakened to above R2/$ in 1985.

This weakening moderated somewhat as Nelson Mandela came to power as the first democratically elected president of South Africa.

From 1985 to 1994, the currency weakened marginally to R3.$. However, it would collapse in the decades to come.

Old Mutual chief economist Johann Els explained that the rand’s value represents investor sentiment toward the country.

Thus, its constant depreciation since 1994 is reflective of a gradual lack of confidence in the South African economy and increased political uncertainty in the country.

The local currency is known for its volatility, often reflecting investor sentiment towards emerging markets and commodities.

This results in significant value swings influenced by economic data from South Africa’s primary exports and, more importantly, investors’ risk tolerance.

However, these fluctuations are generally short-term, as the rand typically continues its long-term trend of depreciating against the dollar.

According to Els, the rand loses about 5.5% of its value annually compared to the US dollar, which greatly increases the cost of imports for South Africa and reduces the international purchasing power of local consumers.

Worryingly, the rand has begun to weaken beyond its fair value, indicating that South Africa faces a confidence crisis. The rand’s fair value is far closer to R15/$ than the level it is currently trading at, above R18/$.

The relationship between the rand’s actual value and its fair value is shown in the graph below, with the currency beginning to weaken significantly in the last decade.

The rand was not always weakening versus the dollar, with the currency holding its value for the decade from 2004 to 2014.

This period of relative rand strength was due to then-President Thabo Mbeki’s focus on implementing a policy framework to slash government debt and grow the economy.

South Africa’s fiscal deficit gradually reclined, the country avoided falling into a debt trap, and growth began to pick up.

In its 30-Year Macroeconomic Overview of South Africa, the Bureau for Economic Research (BER) said that during the first fifteen years of democracy, GDP growth averaged 3.6% per year and reached a peak of 5.6% in 2006.

The government even managed to run consistent budget surpluses under Mbeki. All of this combined to support the rand’s value and stopped it from weakening for a decade.

This changed dramatically when Jacob Zuma replaced Mbeki as President. Pravin Gordhan stepped in as Finance Minister after Trevor Manuel, leading to a surge in government expenditure.

The robust GDP growth seen during Mbeki’s presidency came to an end, and the nation’s debt began to climb swiftly under Zuma’s leadership.

The last instance of a budget surplus occurred in the 2007/08 financial year. Since then, the government has recorded 16 consecutive years of budget deficits.

This pattern persisted and intensified under President Cyril Ramaphosa despite his and the Finance Minister’s commitments to fiscal responsibility.

Consequently, South Africa’s average annual growth rate was a sluggish 1.1% between 2009 and 2023.

The phrase “lost decade” often refers to the period from approximately 2014 to the present, marked by stagnant economic growth, high unemployment, and growing inequality.

This decade saw the rand weaken severely from around R7/$ to above R18/$.

Els said the continued weakening of the rand reflects investors’ lack of confidence that the Government of National Unity (GNU) will be able to arrest the country’s economic decline quickly.

The graph below reflects the declining confidence in South Africa’s economy since 1994 and the effect that has had on its economic performance.