Loaded for Bear: The rand and JSE’s performances are good for the economy, but don’t reflect it

Six months ago, the rand was once again down and looked to be on its way out. 

In April, according to South African Reserve Bank (Sarb) data, the rand fell as low as 19.61/dollar, nearing the record lows it had reached almost two years before. 

Earlier this month, the currency hit 17.17/dollar, its best level against the greenback in two years. It’s pulled back from there since, but a run below 17 before the end of the year is certainly plausible. 

The JSE meanwhile has been on an absolute tear of note. The All Share Index has scaled record peaks and the sky currently appears to be the limit. 

At first glance, it seems that the performance of both is in defiance of the laws of economic gravity. There are a few economic fundamentals underpinning this state of affairs. 

South Africa’s gross domestic product (GDP) grew a paltry 0.1% in the first quarter (Q1) of this year, and then expanded by a faster-than-expected but still sluggish 0.8% in Q2. The economy is generally expected to eke out growth of just over 1.0% this year, which is hardly shooting the lights out. 

Worryingly, gross fixed capital formation — a broad measure of direct investment into fixed assets such as buildings — shrank in Q2 for the third consecutive quarter. That is a key gauge of confidence in the economy and for it to really grow at meaningful levels, gross fixed capital formation needs to stop shrinking and start expanding at a brisk pace.

Read more: After the Bell — Of confidence and capital

So, what is going on?

In the case of the rand, on account of its liquidity, free exchange rate and the relative sophistication of South Africa’s financial markets, it has long been a proxy trade in the basket of both emerging market and commodity currencies.  

And the prices of gold and platinum group metals have been scalding hot. This goes against the grain of commodity prices overall, which have been pulled lower by the falling value of agricultural products. 

Gold last week reached a new record high of $4,000 an ounce —  just six months after it reached the milestone of $3,000 and double the price it was fetching two years ago.  

Central bank buying and geopolitical turmoil have been the key drivers behind this long rally. 

Platinum group metals (PGMs) prices have also been on the rebound for the past few months, driven by a range of factors including jitters about tightening supplies after years of underinvestment in new mines in South Africa, which accounts for about 70% of global production.

JSE-listed producers of gold and PGMs have seen their share prices take off like a rocket, helping to propel the key indices to lofty heights. 

But none of this is really a reflection of the wider South African economy, which is clearly in the doldrums. It is linked in large part to rising prices for some of the commodities produced and exported from here. 

For example, South African mineral sales rose 23.5% year-on-year in August, according to data released this week by Stats SA. 

Gold sales surged an astonishing 471.5% over that timeframe, while PGM sales were 44.1% higher.  But neither sector is about to suddenly hire tens of thousands of new miners — though if prices remain elevated, new investments should lead to job creation in the long run, and marginal shafts will be spared the axe. 

Overall, the South African economy hardly has this kind of sparkle, and remains scarred by the terrible trifecta of unemployment, poverty and inequality. 

Hunger on the rise

Hunger, for example, has been on the rise, a point driven home by Stats SA’s Food Security Report released earlier this year. 

“The proportion of households in South Africa that experienced moderate to severe food insecurity was estimated at 15.8% in 2019, 16.2% in 2022, and 19.7% in 2023. Over this period, the proportion of households that experienced severe food insecurity was estimated to be 6.4%, 7.5%, and 8.0%, respectively,” it said. 

Slow economic growth, sky-high unemployment, increasing hunger: that is the lived reality of millions of South Africans who are for the most part disconnected from the performance of the rand or the JSE. 

Having said that, the rand’s gains and the JSE’s bull run are still good for the economy, even if in many ways they don’t mirror it — except in a distorted, fun house mirror kind of way. 

A stronger rand contains inflation by making imports less costly — notably for key commodities such as oil — and this in turn leads to lower interest rates, easing borrowing costs for consumers and companies alike. 

On the JSE front, millions of South Africans have exposure through their retirement funds and other investments. And while most of the population does not, many of those will be the dependants of someone who does. 

A red-hot JSE also attracts portfolio inflows, which in turn help to prop up the rand. 

There is, in many ways, a disconnect between financial markets and the broader South African economy. But the rand and JSE can still play a positive role and provide a foundation for the growth that is needed by dampening inflation and boosting the investments — and ultimately spending power — of those fortunate enough to own shares either directly or indirectly. 

Imagine if the rand was at historic lows and the JSE’s value was, say, 30% less than its current levels. Inflation would be gathering pace, interest rates would be rising instead of falling, and millions of South Africans would be poorer. 

Come to think of it, maybe there isn’t such a disconnect after all. DM