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Blog : 28 July 2016 (Foreign Debt vs Rand/Dollar)
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We take a look at the impact a weakening exchange rate has on South Africa's foreign debt as a % of GDP. As the Rand weakens, outstanding debts in foreign countries becomes more expensive for South Africa to pay off, and the value of such debt, as a % of South Africa's total economy increases. We take a look at South Africa's foreign debt as % of South Africa's economy (GDP).
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Foreign Debt vs Rand Dollar Exchange Rate
Its clear from the line graph above that the two variables follow a very similar trend. This is due to the fac that a weakening currency makes the current value of foreign debt more expensive in the borrower's currency.
So say South Africa has $1 000 000 in debt that it took out at R10/$1. This $1 000 000 (in Rand's is worth R10 000 000). Now if the exchange rate depreciates rapidly to say R12/$1, that $1 000 000 (in Rand's is R12 000 000). Thus in Rand terms the loan value became 20% more expensive to pay off. Yet in $ value it's still the same loan.
And since the country's economy is measured in Rand's too, its no surprise that as the Rand weakens, foreign debt as % of GDP increases, since the value of foreign debt increases as the currency weakens.
So say South Africa has $1 000 000 in debt that it took out at R10/$1. This $1 000 000 (in Rand's is worth R10 000 000). Now if the exchange rate depreciates rapidly to say R12/$1, that $1 000 000 (in Rand's is R12 000 000). Thus in Rand terms the loan value became 20% more expensive to pay off. Yet in $ value it's still the same loan.
And since the country's economy is measured in Rand's too, its no surprise that as the Rand weakens, foreign debt as % of GDP increases, since the value of foreign debt increases as the currency weakens.
The sad reality for South Africans is the fact that government spends more and more money to service their offshore debt, instead of spending it locally on South Africans. And this is part of the reason that the South African government has been helpless in boosting economic growth in the country, as money that could have been spent here is flowing out to pay our creditors. And as the Rand weakens and foreign debt as % of GDP increases, less and less of the South African economy is actually in the hand of South Africans, and more and more of it belongs to foreigners.
This adds an additional dynamic for the South African Reserve Bank to think about, as raising interest rates, will lead to poorer economic performance, but could lead to the strengthing of the Rand as foreign investors seek high yields. Stronger Rand means foreign debts are paid off easier, freeing up money for government to spend elsewhere.
South Africa doesn't have a integrated and co-ordinated plan to solve their economic problems, and often the different spheres implement policies that contradict one another, as we have mentioned before in our Monetary Fiscal Policy mix write up. Sadly the data only goes up to end of 2015. What would be interesting to see is the effect of continued Rand weakeness and negative economic growth (Q2:2016) on our Foreign debt as % of GDP for the year 2016.
