Is the Rand Really all that Leveraged to Commodities?

An oft-heard statement in financial media is something akin to the following:

“Emerging Market currencies, such as the South African Rand, are under pressure due to their reliance on commodities”

USDZAR – December 2015 Through March 2016 Performance


Source: Bloomberg

While this sentiment makes a bit more sense when considering South Africa’s stock market, the entirety of which (measured using the FTSE/JSE All Share Index) is composed of almost 14% in basic resources stocks, the same is not immediately true of the Rand. To exactly what extent does South Africa’s economy depend on the export of commodities?

Immediately the question may seem impossible to answer – an economy is a giant, interconnected system and attempting to quantify one particular aspect of it is always going to have some issues. That being said, this article will take a look at a couple of simple ratios to look deeper into how reliant we are on the export of raw commodities, where we will analyse the figures as a percentage of GDP as a proxy for “reliance”.

Data from the South African Reserve Bank’s Quarterly Bulletin indicates that about 84% of total goods exported from SA is physical, merchandise goods. The remaining is in services. The figure was roughly the same for 2014, at 85%. For imports, the proportions are approximately equal.

To gauge what proportion of those exports are in traditional hard commodities (i.e. precious metals, base metals, iron ore, steel etc.), data was obtained from the South African Revenue Service’s Trade Stats. These data overestimate the values if anything, as they are not granular enough to discriminate between “articles” of the commodity, and the raw commodity itself in this case. These commodities were highlighted specifically because they have been in the spotlight lately, dropping in value from what is likely a demand deficiency globally (specifically in China). For 2014, the proportion of export value made up of hard commodities was roughly 45%, and dropped to 43% in 2015. For imports of commodities, in 2014, the figure was 24%, falling to 17% in 2015.

The point of the above is to determine how SA would react to a decrease in commodity prices. Clearly when broad prices decrease, exports are worth less internationally (because most commodities are priced in U.S Dollars). However, imports are cheaper as well. In the absence of currency moves, if proportions of GDP are similar, one would expect a zero net impact on the economy.

Indeed, when calculating Net Exports of Commodities (exports of commodities less imports of commodities) and representing it as a proportion of GDP, one gets a figure of 6.38% for 2014 and 7.72% for 2015. To put this into perspective, The Economist magazine estimated the same metric for a number of other countries, averaged over the period from 2010 to 2013. Brazil, Russia, Canada and Australia all had a greater net commodities dependence.

This figure is not huge – and that is good because it means that the commodity price drop, while having a definite impact on the economy, was perhaps muted by the commensurate cheapness of commodity imports. As to why the reliance increased in 2015; that was perhaps driven at least in part by the significant weakening of the Rand. The idea here is that cheaper imports were offset by the weaker exchange rate, meaning they weren’t all that cheap in the end.

In conclusion, in evaluating the original claim that Rand weakness was the result of gut instinct by traders shorting a country reliant on a crumbling commodity market, the above analysis suggests this is not the true reason at all.

Moreover, it seems more likely that other factors were at play in the weakening. Namely, high unemployment and a drought which is increasing basic food prices (and therefore the inflationary outlook). Finally, all of these factors amplified by the stark increase in political risk, on the back of the firing of South Africa’s well-regarded former Finance Minister, Nhlanhla Nene, which occurred on 9 December 2015 and saw the Rand lose almost 9% in 3 days.