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Rand leapfrogs Nigeria's naira as Africa's top currency

12 August 2016

The South African rand has regained its position as Africa's top currency, leapfrogging the Nigerian naira this week.

This comes after four major events in recent months: the Brexit vote, the South African municipal election results, the rand gaining more than 16% against the dollar since the start of 2016, and the naira losing more than a third of its value after Nigeria's central bank removed a currency peg in June.

South Africa's economy was at $301-billion (R4-trillion), while Nigeria's gross domestic product (GDP) was $296-billion (R3.9-trillion), Bloomberg reported. These figures are based on GDP at the end of 2015, published by the International Monetary Fund.

The momentum that took the naira above the rand two years ago was now long gone, according to the Bloomberg article.

Business Day Live reported that at 9.05am on 12 August‚ the rand was at R13.4267 to the dollar from R13.4065 at the previous close. It was at R14.9591 against the euro from R14.9303 previously‚ and at R17.3839 against the pound from R17.3670 previously.

Despite the positive news on the rand, Bloomberg said its reign as top currency may not last long as the naira may bounce back.

The rand got a major push following Britain's vote on 23 June to exit the European Union, which made investors turn to emerging markets. But the South African local elections on 3 August, particularly its dramatic results, have encouraged investors even further.

Local elections

The local government elections – whereby the African National Congress lost a few major metros to the opposition Democratic Alliance because of a substantial dip in support, and the Economic Freedom Fighters grew its support – benefitted the rand, stated the Financial Times. Investors are encouraged by the notion that pressure will be put on the ruling party to introduce economic reforms that will boost growth and cut unemployment.

The election results were seen as a positive by investors because it meant President Jacob Zuma's power was dwindling, Luis Costa, CitiGroup's strategist, told Financial Times. Events such as the axing of former finance minister Nhlanhla Nene were less likely to be repeated. "The implications of this week's election outcome are market-friendly."

In another interview with Bloomberg, Costa said: "It will keep Zuma in a very secondary stance when it comes to making economic policy decisions at least over the next quarter."

Investors had been encouraged by significantly lower energy prices over the last three months and steadiness in iron ore, platinum and gold, Costa added. "That in general produces a very nice dynamic in terms of trade for South African assets."

Investors treading cautiously

Despite the good news, Reuters reported early on the morning of 11 August that the rand’s rally against the dollar had paused, with investors treading cautiously after Statistics South Africa released data on local mining and manufacturing.

According to Stats SA, mining production decreased by 2,5% in June 2016 compared to the same period in the previous year, with the most negative performers being manganese ore, diamonds, nickel, copper and other non-metallic minerals. Coal, however, remained on a high.

In May 2016, mineral sales rose 17,4% compared to the same period in 2015.

In the meantime, use of production capacity by large manufacturers was 81,6% in May 2016 compared with 80,3% in May 2015, an increase of 1,3%.

Sources: Bloomberg, Statistics South Africa, Reuters and SouthAfrica.info reporter.

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