Investors still see risk in South African Rand

Since 2001, South Africa has been an emerging markets superstar, having seen its currency, the Rand, more than double against the USD. On paper, the Rand’s appreciation seems to be supported by fundamentals. South Africa has narrowed its budget deficit, core inflation is low, and interest rate levels have stabilized around 7%. However, currency traders continue to view the Rand as risky. In most developing countries, high bond premiums are usually attributed to default risk, the likelihood that the government will default on the debt. In South Africa, by contrast, a recent study found 90% of bond premiums could be explained by currency risk. It seems investors are not worried about the government defaulting, but rather they are concerned about the possibility of Rand depreciation. The Economist reports:

Unusually, the Rand is a popular hedging tool for foreigners. The average daily trade in Rand has ballooned since 1998 to nearly $14 billion, most of it by non-residents.

Read More: An Eye on the Rand