Rand manipulated by banks

I VIEW the ongoing revelations and legal proceedings concerning the alleged manipulation of the rand by major banks with deep concern. This is more than a technical breach of financial regulations; it represents a profound betrayal of trust, striking at the heart of SA's economic integrity and the financial well-being of its citizens.

The concept of currency manipulation, or "fixing," involves a clandestine agreement among market participants to artificially influence exchange rates, deviating from their true market-driven values. In the context of the Rand, such actions could have had far-reaching and insidious consequences, distorting economic signals and undermining the foundational principles of a fair and transparent market.

Rand fixing point to a coordinated effort by traders at various local and international banks. This typically involves collusion to coordinate buy and sell prices in the Rand against the US Dollar. They agree on specific price levels or trading ranges, or by sharing confidential client information, thus manipulating currency. The perpetrators' objective would be to profit from these artificially skewed rates, often at the expense of clients, other market participants, and ultimately, the broader economy.

The Rand fixing scandal casts a long shadow over SA's standing in the global financial community. At a macro level, a nation's currency is a barometer of its economic health and stability. When tampered with, it erodes international investor confidence. Integrity, lack of transparency and allegations of collusion may suggest systemic vulnerabilities that deter much-needed foreign direct investment (FDI) and portfolio investment.

As an emerging market with inherent volatility risks, currency manipulation exacerbates the challenge of attracting capital, which is crucial for economic growth, job creation, and infrastructure development. This leads to higher borrowing costs for the government and state-owned enterprises.

This, in turn, diverts public funds from essential services to debt servicing, further straining the national budget. Our image as a reliable and predictable investment destination is severely compromised, hindering its aspirations for inclusive economic development.

Impact on the economy

The most direct impact is on the integrity and efficiency of the foreign exchange market. Currency exchange rates are supposed to reflect the relative supply and demand for currencies, driven by economic fundamentals, trade flows, and capital movements. Banks' collusion creates an artificial environment where prices don't genuinely reflect economic realities, leading to inefficient allocation of resources and distortions in financial markets.

- Inflation and trade: If the Rand is artificially weakened, the cost of imported goods and services rises, feeding into higher consumer prices; this is inflation. This disproportionately affects low-income households, eroding their purchasing power and exacerbating inequality. Conversely, an artificially strengthened Rand could harm exporters by making South African goods less competitive internationally, hurting export revenues and potentially leading to job losses in export-oriented industries.

- Investment and business planning: Businesses engaged in international trade rely heavily on stable and predictable exchange rates for planning and risk management. Currency fixing introduces an element of unpredictability and unfairness, making it exceedingly difficult for companies to hedge their currency exposure effectively, discouraging long-term investment.

- Cost of living: With the Rand's weakness, households would have faced higher prices for imported goods, from fuel and electronics to basic foodstuffs. This translates into a higher cost of living, squeezing household budgets and reducing disposable income. We are already grappling with high levels of poverty and unemployment, and any artificial increase in living expenses is particularly painful.

- Savings and pensions: Households with savings, investments, or pensions exposed to international markets may have the value of their holdings artificially diminished if the Rand is deliberately weakened, or conversely, see reduced returns if the Rand is strengthened against their benefit.

- Trust in financial institutions: The most damaging impact on citizens is the erosion of trust in financial institutions. Banks are entrusted with safeguarding wealth and facilitating economic activity fairly. When institutions meant to be pillars of stability are implicated in manipulative practices, it fosters cynicism and distrust. This can lead to disengagement from formal financial systems, potentially pushing individuals towards less regulated or illicit channels, which carry risks. It also fuels a perception that the financial system is rigged against the ordinary person, exacerbating societal divisions.

- The Rand rigging case before the courts -  a battle for justice and market credibility: The ongoing legal proceedings involving major banks and the Competition Tribunal/Commission are critical for South Africa. The Competition Commission's investigation, which has been lengthy and complex, alleges that various local and international banks colluded to fix prices and divide markets for spot trades in the Rand against the US Dollar.

This is a stark reminder of the ethical and regulatory vulnerabilities within even the most sophisticated financial systems. As a nation, we can't afford to have our economic destiny swayed by the manipulative actions of a few.

The impacts - from diminished international standing and economic instability to a higher cost of living for ordinary citizens and a pervasive erosion of trust - underscore the gravity of these allegations.

The ongoing court case is more than a legal battle; it's a fight for the soul of South Africa's economic future. A strong, decisive, and just outcome is indispensable not only for penalising past transgressions but, more importantly, for safeguarding the integrity of our markets, fostering an equitable economic environment, and rebuilding the indispensable trust between financial institutions and the people they serve.

Advocate Lavan Gopaul is the director of Merchant Afrika.

** The views expressed do not necessarily reflect the views of IOL or Independent Media. 

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