Has South Africa's wild rand finally been tamed?

JOHANNESBURG - Has the "wild child" of the emerging markets finally settled down or is South Africa's rand just taking a breather?

For much of the past decade, the currency has experienced spectacular ups followed by crashing downs.

But as 2005 draws to a close, the currency seems to have finally found some stability -- at least by its extremely turbulent standards.

"If you look at the historical volatilities of the rand you'll find that they have declined through the year," said ETM markets analyst George Glynos.

The rand has stabilized in the face of a yawning current account deficit which swelled to a record 72.9 billion rand ($17.02 billion) in the third quarter of this year from 55.5 billion rand in the second.

"Volatility has certainly reduced despite a widening current account deficit, but capital inflows have been strong and this has helped," said Adenaan Hardien, economist at Cape Town-based African Harvest Fund Managers.

Analysts say there are many related reasons for this comparatively sedate state of affairs, ranging from increased liquidity to rising foreign exchange reserves to the government's management of Africa's largest economy.

And it appears the currency may have finally found a range it is relatively comfortable with, between 6.30 and 6.70 rand to the dollar -- an area it has inhabited for much of 2005.

The numbers speak for themselves.

The rand has lost about 12 per cent against the US dollar in 2005 to date, its first depreciation over a calendar year since 2001 and a relatively mild move after three straight years of hefty gains.

In 2002 it soared 40 per cent against the dollar, in 2003 it added 28 per cent and last year it chalked up around 18 per cent in gains.

Its swings have also moderated -- considerably.

In 2005 it ranged between a high of 5.6170 to the dollar, reached early in January, to a low of 6.9770 in June -- a difference of 136 cents.

In 2004 its range was about 200 cents, in 2003 almost 300 cents and in 2002 it was 410 cents.

In 2001 -- when it sank to an historic low of 13.84 to the dollar on December 21 -- it was extremely volatile, gaining around 200 cents alone in the last 10 days of the year.

In 1998, when it was hit by a broad crisis among emerging markets, there was also a difference of about 200 cents between its high and its low -- further underscoring the relative calmness of 2005.

Analysts say increased liquidity has helped the rand find its footing.

According to central bank data, the average daily turnover in the country's foreign exchange market has soared from $3.8 billion in the first quarter of 1998 to $13.8 billion in the third quarter of this year.

Some critics say this increase partly stems from pure speculation as growth in trade and the economy, while brisk, have not been nearly as impressive.

But the market's swelling size has made it more difficult for speculators with shallow pockets to push the currency far in either direction -- a scenario borne out by the fact that the rand is usually at its most erratic when trade is quiet.

Deepening liquidity also points to growing confidence in an economy which most analysts agree has been well-managed -- especially by emerging market and African standards.

"Improved credit ratings and growth prospects have helped the rand stabilise, along with good foreign direct investment inflows," said independent economist Noelani King-Conradie.

South Africa's economy is expected to grow by 5 per cent in 2005 after expanding 4.5 per cent in 2004, Finance Minister Trevor Manuel said earlier this month.

Big foreign direct investment inflows have included British bank Barclays purchase of a controlling stake in local bank Absa in a deal worth over $4 billion.

The government has been lauded for its fiscal discipline while monetary policy has kept inflation under control, with the consumer price index measure monitored by the central bank within its 3 to 6 per cent target range for 27 straight months.

"Rand stability is a great thing because companies and investors want stability for budgets and prospects and planning. However, some exporters may find the rand is still too strong," said King-Conradie.

The rand could still fall off the wagon with a big thud and lapse back into its wild ways in 2006.

But with brisk economic growth seen attracting more investment and commodity prices expected to remain high, it may become, for a change, a staid and boring currency

- REUTERS