Neo Ralefeta

Neo Ralefeta

Treasury Structuring

60 YEARS OLD AND GOING STRONG… HAPPY BIRTHDAY TO THE ZAR

The South African Rand aka the ZAR aka the Rattler has just turned 60 years old.

 

On 14 February 1961 the British Pound, Shilling and Pence were replaced by Rands and Cents as the official South African currency at an exchange rate of GBP 1=ZAR 2, now trading at GBP 1=ZAR 20.14.

 

Since then, average inflation has eroded the buying power of the Rand - starting off at around 1.9% in 1961 and peaking at 19.7% in 1986 during times of political and social unrest in South Africa.

 

Inflation being the average change of prices for a given basket of goods during a specific period, has averaged 8% annually from 1961 to 2020 in South Africa. A direct effect of this is that prices of goods have increased 97 times in that period, significantly eroding the purchasing power of the Rand.

 

According to Stats SA, this is what R1 could buy you 60 years ago and what the cost of those items were in 2020:

 

One fresh chicken at 70 cents vs R58.09

570ml of beer (a pint) at 16 cents vs 330ml at 14.56 ( or 9 cents in the 1960s)

A pack of 20 cigarettes at 19 cents vs R43.14

 

 

Let’s look at this another way… A house that costs 5 million rands today would set you back about 51 grand sixty years ago, and a 2 million rand car about 20 grand.

 

Inflation, as evidenced above, has the ability of eroding the purchasing power of any currency. If left unchecked, it can lead to the explosion of prices and push people into extreme poverty.

 

In February 2000, in a bid to protect the value of the Rand, South Africa formally introduced an inflation targeting framework. The SARB’s mandate (a constitutional mandate) is to contain inflation within the 3 and 6 percent target band. The SARB responds to levels of inflation by either increasing interest rates - when inflation starts threatening the 6% upper band - or decreasing interest rates when inflation approaches the 3% lower band.

 

Inflation for year 2020 averaged 3.3% and is now forecasted to start increasing. With this, the SARB has indicated that they would need to start increasing interest rates in South Africa, starting with two increases of 25bps (0.25%) towards the end of this year.

 

A massive cheers to the ZAR. May its value be protected, and may we hedge ourselves against increasing interest rates that can erode our financial bottom lines.