In his book Sapiens: A Brief History of Humankind, author Yuval Noah Harari distinguishes between two kinds of chaos. A "level one" chaotic system is a system that does not react to predictions about it. The weather, for example, is a level one chaotic system.
The weather is influenced by myriad factors so complex that extremely small variations in the strength of forces and the way they interact produce huge differences in outcomes. But it is possible to build computer models that take more and more of these differences into account and gradually they produce better and better weather forecasts. Judging from the vacillating rate of correct weather predictions, some may doubt this assertion but theoretically, at least, Harari’s observation makes sense.
Markets are a "level two" chaotic system because they are affected by predictions about what will happen. Harari uses the example — not that such a thing exists — of a computer program that forecasts with 100% accuracy what the price of oil will be tomorrow. The price will, of course, immediately react to the forecast, which will consequently fail to materialise. Instead of reaching the computer program’s prediction of what the oil price will be tomorrow, that price will be reached today.
The value of the rand is somewhat affected by this level two chaotic system syndrome. Yet, despite the vagaries of the system, like all free markets, the fact that the rand is so eminently tradable had more advantages than disadvantages.
When the Turkish lira collapsed this past weekend, the rand got thumped, not only for its own sake but because it will affect predictions of what is likely to happen in emerging markets everywhere in the future.
Compare, for example, the SA economy’s response to the great recession with that of Greece. SA’s GDP growth rate declined but rebounded fast. By virtue of its membership of the eurozone, Greece was unable to benefit from a currency decline during the recession, and at its highest point, the economy declined by about 5%, then 11%, then 7% in successive years from 2010 onwards.
SA, on the other hand, shrank 2.5% in the wake of the crisis. The rand was massacred but rebounded fast. By the time the global recession had spread to Greece, the rand was already above the level it was in 2008. In a sense, the economic system performed its miracle; the rand operated like a shock absorber, taking the sting out of the recessionary environment.
This is, however, not the end of the story. From about 2012, the rand has been on the skids. Economic decay during the Zuma years — during which institutions were undermined and business confidence waned — gradually took its toll on the currency. From its high in 2011 to its low in 2016, the rand lost half its value. It has rebounded from there, but not by much.
The rand is now — in the minds of traders and business people — a structurally weak currency.
What’s more, the rand has gradually become more and more a happy hunting ground for currency traders. The Bank of International Settlements estimates that $18bn worth of rand is traded in various forms every day. If you compare that with SA’s GDP, the rand is by enormous margins the most traded currency in the world. About 19% of SA’s annual GDP is traded every day. China, for example, trades about 2% of its annual GDP on the currency markets every day. Mexico trades about 10%.
As a result, the rand has become something of a proxy for global emerging-market risk. When the Turkish lira collapsed this past weekend, the rand got thumped, not only for its own sake but because it will affect predictions of what is likely to happen in emerging markets everywhere in the future.
But this too is not the entire story. The Russian rouble, for example, fell by similar amounts to the rand even though it is only modestly traded internationally. The currencies of other countries that technically fall into SA’s economic bracket of "lower middle income", like Indonesia’s rupiah, barely responded at all. The Mexican peso did fall but off a higher base. The peso is still trading higher than the dollar on a year-to-date measure.
The fact is that outside of what you might call the normal chaos, SA is still seen as being on the wrong economic track and that is reflecting in our currency. The ANC’s continuing factional tug-of-war, the "expropriation without compensation" debate and SA’s continuing fiscal deficit are all playing a role.
In an implicit recognition of this weakness, the Treasury on Monday issued a short media release referring to news reports that state-owned enterprises would be bailed out yet again by the fiscus and saying funds would come out of existing resources. How that happens remains to be seen, but the very fact that the Treasury responded suggests that it at least is aware of how this is playing out globally.