There have been calls recently from some commentators to re-consider the one-to-one peg of the Namibia dollar to the South African rand, because of the rand’s strong depreciation over the past year. It is interesting to note that these calls are usually made, when the rand is under pressure, not when it is appreciating against major currencies.

Before evaluating the merits of such calls a brief review of the rand’s performance vis-à-vis major currencies such as the US dollar (USD) and some emerging market currencies such as the currencies of the BRIC countries (Brazil, Russia, India, China) is necessary.

The South African rand (ZAR) showed periods of appreciation and depreciation against the USD, the British pound (GBP) and the Euro (EUR) over the past 10 years. In addition, the performance against these three currencies has not always been alike. During 2005 the ZAR appreciated by between 1.3 per cent and 2 per cent against these currencies, but lost value in the following three years in particular against the Euro.

Compared to 2005 the ZAR depreciated by the end of 2008 against the Euro by more than 50 per cent, but only by some 30 per cent against the USD and GBP. Some of the losses were reversed in the following two years, when the ZAR appreciated by between 11 per cent (USD) and 25 per cent (GBP) as at the end of 2010 compared to 2008.

In 2011, the South African currency moved sideways, appreciated slightly again vis-à-vis the USD, but lost slightly against the two European currencies. Since 2012 the ZAR started losing ground, but still appreciated slightly against the EUR in 2015 when comparing the average value of the currency in 2015 to 2014.

The fact that the performance of the ZAR against these three currencies differed in magnitude and sometimes even in direction suggests that the performance has not only been influenced by internal, domestic factors, but by external factors as well. This is further corroborated when comparing the value of the ZAR against the Japanese yen.

The direction and degree of change often differed substantially compared to the rand’s performance against the other three currencies.

Furthermore, the rand showed a mixed performance vis-à-vis the BRIC currencies. Since the Chinese yuan’s value was guided by the USD, the ZAR depreciated over the past two years, but slightly less compared to the USD.

It also lost value (8 and 12 per cent) against the Indian rupee in 2014 and 2015 respectively. On the other hand, the rand appreciated strongly against the Russian rouble by 6 per cent and 27 per cent over the same period and gained last year against the Brazilian real 16 per cent.

Although the weaknesses of the latter two currencies can to a large extent be attributed to domestic factors (drop in energy prices and economic sanctions in the case of Russia; economic challenges and political uncertainty in the case of Brazil), global factors play a crucial role in the performance of in particular emerging markets currencies.

There was the time of the USD80 billion per month bond-buying programme of the US Federal Reserve Bank that flushed the markets with liquidity and resulted in the depreciation of the USD and the appreciation of among others emerging market currencies such as the ZAR.

The expectation that the Federal Reserve Bank will increase the policy interest rates in the US changed financial investors’ sentiments and coupled with uncertainties about the direction of the Chinese economy and globally weak commodity prices resulted in increased risk aversion and the search for safe havens. Contrary to trends in the past, it was no longer gold that played the role of a safe haven, but currencies such as the USD, which resulted in the depreciation of emerging market currencies in general and not only the ZAR.

On the other hand, not only emerging markets but also countries such as Denmark used monetary policy to gain competitive advantages. Talk of a currency war made the rounds. China devalued the Chinese yuan in the second half of 2015, which triggered currency adjustments in other countries such as Kazakhstan, Turkey and Vietnam.

Countries devalued their currencies in order for their goods and services to become more competitive on the world market. Kazakhstan for instance de-linked the Kazakh tenge from the USD in August 2015 and the currency’s value dropped by more than 20 per cent. Currently, Saudi Arabia and Hong Kong consider de-linking their currencies from the USD for the same competitiveness reasons. While quite a number of countries took or are taking steps to devalue their currencies other countries have faced economic challenges owed to the appreciation of their currencies, notably Switzerland and the USA.

Switzerland terminated the cap of the value of the Swiss franc against the Euro in January 2015, which resulted in a steep appreciation of the Swiss franc and a loss of competitiveness of Swiss exporters and subsequently a lower economic growth rate. The strength of the US dollar is one of the reasons for a downward revision of economic growth expectations for 2016 from 2.8 per cent to 2.6 per cent by the International Monetary Fund (IMF) in January 2016.

These monetary policy responses indicate that the appreciation or depreciation of a currency is not ‘good’ or ‘bad’ per se. The depreciation of a currency is a monetary tool to among others gain competitive advantages since domestic goods and services become less expensive not only on the international market but also on the domestic market compared to goods and services from countries which currency appreciated. The depreciation of a currency is therefore been used as an industrial policy instrument.

The flip side of the coin is however, that imports become more expensive, including imports that are used in the production of exportable goods. In countries with a narrow industrial base, such as Namibia, that rely on the importation of most consumer goods and coupled with an arid climate depend on the importation of most of the foodstuff, increasing import prices can finally lower the population’s standard of living unless they are compensated for the rising costs of living by increasing salaries, wages and or social transfers.

South Africa’s currency was however hit harder recently than some other emerging markets’ currencies, because of a combination of the external factors mentioned above and domestic factors such as policy uncertainty, structural issues, widening budget and current account deficits, downgrading by sovereign rating agencies, and low growth prospects. For instance, the IMF changed its economic growth estimates for South Africa for 2016 drastically from 3.7 per cent in January 2015 to just 0.7 per cent in January 2016. There is also a risk that South Africa faces a further downgrading that markets might already factor in. These factors contributed to the strong depreciation of the ZAR in recent weeks and by implication of the Namibia dollar, the Lesotho loti and the Swazi lilangeni.

Even if Namibia does not face all the same domestic factors that contributed to the devaluation of the South African rand, the country will still be exposed to the external factors.

Given the narrow industrial and export base of Namibia, the economy and by implication the currency is more vulnerable to external shocks in one or more of the dominant sectors, such as diamond or uranium mining or the fishing sector, than a more diversified economy such as the South African. Angola (reliance on oil) and Zambia (copper) serve as examples.

It could therefore well be that a de-linked Namibia dollar would be weaker than the South African rand, which would result in a declining standard of living in Namibia since imported goods and services become more expensive.

In addition, since most of Namibia’s imports are sourced from or through South Africa, prices would be more volatile in Namibia because of additional exchange rate fluctuations. On the other hand, the South African market is important for some of Namibia’s industries, such as the beverage and meat industries.

If a de-linked Namibia dollar appreciates against the South African rand, Namibia’s exports to South Africa become less competitiveness and exporters risk losing market shares.

Last but not least, de-linking the Namibia dollar from the South African rand would imply that we abandon our regional integration ambitions of a monetary union that is still on the agenda even though no new time lines for achieving it have been agreed upon.

Addressing the domestic factors in earnest that contributed to the depreciation will support the recovery of the ZAR and hence the Namibia dollar as soon as investor sentiments change again and emerging markets are not viewed as risks but as opportunities.

Klaus Schade works as economic policy analyst and consultant in Namibia