South Africa's currency, the rand, currently trading in the range of 12.5 rands to the dollar has depreciated against the U.S. and other major currencies by about 40 percent since January - with the greatest part of that decline coming since October. While there is widespread consensus among financial experts the currency is heavily undervalued, there is very little agreement about what can be done to halt the fall.
The South African currency has been under assault since the 1998 crash in the Asian markets, when currency speculators, notably large international banks, found they could offset their losses in Asia by manipulating the rand downward. This attack on the rand intensified earlier this year when the United States economy began to decline.
Dennis Dykes, chief economist at Nedcor Investment Bank in Johannesburg, says the South African currency is easily manipulated because it operates in a very small market with very few players. Mr. Dykes says speculators can make a quick profit by buying the rand in the forward (futures) market and selling it short.
"The speculator only works on direction, the magnitude is immaterial," he said. "So if you can buy something and sell something for a profit every 24 hours, it doesn't matter what the actual level of that is - and that's effectively what's happening. So as long as there is a clear direction, it's a fantastic market to play in."
And it has been as easy as child's play for the speculators. They flouted regulations by borrowing rand to buy in the forward market and then quickly sold short never having to spend their own funds to make a quick profit. The rand soon became their preferred emerging market currency.
In October, Reserve Bank Governor Tito Mboweni announced that currency dealers would no longer be permitted to use borrowed rand to speculate. Almost immediately, increased speculation in the currency began to drive it to new lows. Mr. Dykes says this is because the speculators were angered by the governor's decision and they are now locked in a psychological power struggle with the reserve bank for control of the local currency market.
"Going back to October, there were a lot of annoyed people out there dealing in the rand as an emerging market currency to the extent that it's their major currency as far as emerging markets are concerned," he said. "So clearly it didn't delight and please a lot of people in those markets because it was taking away some of the candy in the dealing rooms."
But not all analysts agree with Mr. Dykes. A number believe the South African currency is being driven down, not by speculators, but by political problems, such as the crisis in neighboring Zimbabwe.
George Glynos, a currency analyst with Standard and Poors MMS, says the decline in South African currency is fueled by the Pretoria government's delay in criticizing political developments in Zimbabwe.
"The government's recent statements have been very positive, have been very good as far as I'm concerned, and what bothers me is why they weren't made in the first place, why they weren't made a year and a half ago," he said. "Why did this negative perception be allowed to build to the extreme and influence the South African markets in the way that it has."
Mr. Dykes agrees that sentiment does play an important role. However, he says the markets discounted negative sentiment about Zimbabwe and other regional issues months ago.
But there is widespread agreement among dealers and analysts that South Africa's economic policies and its management of the economy are sound. Rating agencies have steadily raised their investment ratings. Moody's Investment Services this week was the latest to do so. In its report Moody's said there is no financial crisis in South Africa and endorsed the government's economic policy positions.
But disagreement emerges once again when the same individuals offer solutions for halting the slide in the rand. Some suggest that the government hike interest rates, others that the government inject U.S. dollars into the local market, still others that existing regulations be applied even more stringently. However all, including Nedcor's Dennis Dykes, say that any intervention should only be enough to change perceptions that a continued depreciation of the currency is inevitable.
"But I think what I'm suggesting here and which is certainly a possibility is tactical intervention - in other words making the rand much less of a one-way bet, using limited [measures] just simply to actually create the necessary uncertainty in the minds of local and foreign dealers and importers and exporters [that the Rand is] a straight one-way bet," he said.
In a joint statement breaking their silence on the recent currency depreciation Governor Mboweni and Finance Minister Trevor Manual spelled out once again their intention to stick to their stated economic policies and to avoid major interventions in the market. They said that they do not wish to minimize the economic implications of the slide in the rand, but urged exporters to take advantage of this situation while they may, and pointed out that South Africa is the third fastest-growing export market in the world at present.
Finally, Mr. Mboweni and Mr. Manual warned that existing regulations will be strictly enforced, even as the government continues its process of further liberalizing the markets.
Part of VOA's Year End Series for 2001