Although some causes for the volatility of South African’s rand are self-inflicted, the currency is also impacted by international “currency wars” currently engulfing the world, whereby governments, most from industrial countries, manipulate the value of their currencies to improve export competitiveness.

In 2010, then Brazilian finance minister Guido Mantega termed the phrase “currency war”, warning that some countries, particular the US, the EU and Japan, were seeking to devalue their currencies to reboot their economies.

Mexico’s finance minister Luis Videgaray last year warned: “There is a real concern that, in the face of the deceleration of the Chinese economy, the public policy response will be to start a round of competitive devaluations.”

India’s Financial Stability and Development Council in a report published late last December argued that the slowdown in the Chinese economy, the US slashing of interest rates to boost its economy, and the competitive quantitative monetary policy of central banks across the world threatened a currency war.


Mantega had originally aimed his target at the US, which introduced quantitative easing following the 2008 global financial crisis. Following the global financial crisis, the US Federal Reserve cut interest rates in an effort to stimulate growth.

But because interest rates were already close to zero, the US Federal Reserve, injected money directly into the country’s financial system – what is called quantitative easing (QE).

Simple put, QE is printing new money and buying government bonds. The money is “printed” electronically, and used to buy bonds from pensions funds, banks and so on. This increases the circulation of money in the financial system, and the idea is that this would encourage households and businesses to spend more and so boost the economy.

It is estimated that between 2008 and last year, the Fed bought $3.7 trillion (R55 trillion) of bonds this way.

The European Central Bank (ECB) introduced quantitative easing in March last year, buying government bonds, at about €60 billion (R1 trillion) worth a month, in order to put cash into European banks.

In practical terms the ECB is “printing” new money to buy government debt, to make more money available in the financial systems. In December, the ECB said it would extend this asset purchasing program until March next year, to prevent deflation in the euro zone.

Japan has also weakened its currency to boost its economy. The Bank of Japan introduced negative interest on key deposits from commercial banks, in a bit to compel them to invest abroad, and so weaken the currency. It lowered the value of the yen.

China suddenly devalue its currency against the dollar last August, causing shares to plunge across the world. For the past year China’s central bank has spent more than $500bn to prevent the uan from devaluing any further.

This month Sweden’s Riksbank, the country’s central bank, cut benchmark interest rates from minus 0.35% to minus 0.50%. The value of the Swedish Krona declined because of that – which is what the Riksbank wanted because it calculated that a weak krona would keep inflation low, and prevent the threat of deflation. Sweden’s inflation currently is sitting 0.1%, and the central bank wants to bring up to 2 percent.

QE has boosted the US, euro zone and Japanese economies. However, it has eroded the competitiveness of emerging market economies. The US quantitative easing policy has kept the value of the dollar strong compared with emerging currencies such as the Rand, the Brazilian Real and the Turkish Lira.


Reserve Bank of India governor Raghuram Rajan has rightly warned that the Fed’s monetary policy was causing spillovers in emerging markets, with seesawing capital flows, volatility and the destabilising of financial markets.

What can an emerging market such as South Africa do to combat the impact of the currency war? South Africa’s problem is that we have a volatile currency – which creates uncertainty. South Africa needs a more stable currency. There is very little South Africa can do on its own. South Africa’s foreign exchange reserves are small, making it vulnerable. Aggressive intervention could trigger capital flight.

Furthermore, monetary policy, while crucial, on its own cannot solve the country’s broader economic problems. South Africa needs to get its macro-economic fundamentals right. This means that the country needs to genuinely implement structural reforms. It needs to clean up public finances: cut government waste, mismanagement and corruption.

We need to improve public sector efficiency, cut public sector red tape and bring merit into appointments in order to bring skills and fresh ideas to deal with complex problems. Poorly thought-out policies such as the new strict visa rules for visitors which deter tourism, should be shelved.

South Africa’s infrastructure investment programme will have to not only get back track, but the right catalytic projects should be chosen too, not pork-barrelling ones. The de-industrialisation of the economy must be halted by supporting local manufacturing and moving up the value chain from exporting raw commodities to more value added products.

The second type response must be for South Africa to push emerging markets to come up with a collective response, to counter one-sided monetary policies in industrial countries which may negatively impact on developing countries.

The whole point of South Africa’s involvement in Brics (with Brazil, Russia, India and China) is to collectively come up with strategies to ensure fairer global financial, trade and political rules.


Similarly, African continental organisations such as the AU must now become more relevant and start to focus on the real global issues of our times that negatively affect African countries, such as unfair developed country currency manipulations.

South Africa must help forge a global coalition of developing and industrial countries that should more urgently push to improve the governance or global capital markets and ensure that there is greater global stability and better co-ordination of global monetary policy.


William Gumede – Associate Professor at Wits University