Does Anyone Have a Time Machine?

Back in April 2006, the rand-dollar ratio was just over R6 to the dollar. Today it is over 10. Back in October 2008 it briefly went to nearly R11.5 to the dollar, almost double the rate of two years ago.

Now, if I had access to a time machine, I would take all my liquid cash (now in rands), go back to April 2006 to buy dollars, zoom forward to October 2008 to buy rands, and repeat the process until I could retire on a tropical island. Unfortunately for me, I don't know anyone with a time machine.

I now understand why this happened as well as why the rand is still weak. Taking this knowledge, I can perhaps make a profit next time I want to exchange currency.

So... why did this happen? The rand was at a respectable rate even in early August 2008, when it was about R7.2 to the dollar.

It was part politics and part economics.

In mid-September, there were calls for Thabo Mbeki, to step down as president of South Africa. These calls came from his own party, the African National Congress, and his resignation went into effect as of September 25. Within a month after his resignation, the rand had plummeted from just over R8 to the dollar to its lowest point at R11.47:$1.

Mbeki's economic policies were touted as bringing much foreign investment into the country, but domestically the high unemployment and poverty rates made him increasingly unpopular among the majority. Mbeki was nearing the end of his second five year term as president of South Africa, and became increasingly unpopular for how he dealt with his former deputy president, Jacob Zuma, whom he had fired because of allegations of fraud and corruption. Zuma now leads the ANC and is slated to become next president of the country. The problem with Zuma is that he is embroiled in a long term investigation into his allegedly corrupt involvement in an arms deal, for which his financial advisor is now imprisoned because he solicited a bribe for Zuma.

Right about that same time Mbeki resigned, the United States and other major economies were in the process of bailing out banks and trying to avert a full scale collapse of the global economy. South Africa, like much of the rest of Africa, is very dependent on commodities to sustain its economy. With the downturn in the world economy, demand for commodities such as gold, platinum, and other metals fell, causing the rand in turn to fall. And then there was the widespread shedding of investments in all developing economies, as investors scurried for safer places to put their money.

Add to this the recent breakaway party, the Congress of the People (Cope) that is now challenging the ANC for votes in the 2009 national elections, and you have a very chaotic political situation, one from which most investors will steer clear.

I am not one of those investors. I brought over a good portion of my "wealth" to South Africa. There are a number of reasons why I did so. South Africa is Africa's biggest economy, and a major producer of gold, platinum, uranium, and other metals. As such, when the world economy turns around, the rand will improve. Investors will be attracted to the high interest rates of the banks, which did not feel the effects of the subprime lending collapse that their American and European counterparts did. Also, though the political situation is chaotic, there is not the violence associated with elections that you find in other Third World and African countries.

Now is a good time to buy rands, at just over R10 to the dollar. It will stay there at least until the election in March or April (the exact election date has not yet been set). If Zuma becomes president and is then put on trial, I can see the rand tanking further, and may decide to bring more dollars over. Even amid political turmoil, South Africa is well positioned economically to weather the economic storm, and the banks and businesses here will do better than their counterparts in the First World. Plus, I like that I can make over 10% on my money by just putting it in the bank!

Still... there is risk in this move, and I am the first to admit that this might be a mistake. So... does anyone have a time machine?

(Originally published at The Creating Wealth Blog on 1/25/09)