Question

Question: Historical Relationship between South African Rand, US dollar and currencies of the BRIC Countrie... (1 bookmark) Historical Relationship between South African Rand, US dollar and currencies of the BRIC Countries I BRICS is an acronym for the association of the economies of Brazil, Russia, India, China and South Africa and BRIC is a similar acronym excluding South Africa. Mweleco FX Pty LTD, a foreign exchange trading company based in Johannesburg, has been contracted by a hypothetical Namibian Stock Exchange (NSE) to examine the historical relationship between the Rand(as a proxy for the Namibian Dollar- N$), currencies of the BRIC countries and the US Dollar from April 9, 2006 to March 27, 2011. Issues of interest to the NSE are: • The historical volatility (risk) between the currencies of the BRIC currencies, South African Rand and the US dollar during the period; Project Historical Relationship between South African Rand, US dollar and currencies of the BRIC Countries II • The relationship between BRICS currencies. You are required to provide a brief report (Minimum 4 pages and maximum 8 pages (including tables, figures, references etc.) to the NSE covering the following: (a). A brief introduction of the study; (b). Brief literature review on general issues around currency volatility (risk) and returns; (c). Relationship(s) between the South African Rand, US Dollar and the sampled currencies of BRIC countries and whether the relationship(s) can be, predictably, explored; (d). Brief discussion of the empirical findings from the study; (e). Conclusion and some recommendations to the NSE.

Answer 1

After significant diplomatic efforts, South Africa’s inclusion into the BRICS grouping in 2011 can be regarded as one of South Africa’s principal foreign policy achievements over the past years. It also fundamentally altered the nature of the BRICS group, giving it a more global structure. Yet little is known about why South Africa sought BRICS membership, why it was chosen over larger economies (e.g. Indonesia) or faster-growing countries (e.g. Nigeria), and how this altered South Africa’s insertion into the international system.

Was the BRICs’ decision to invite Africa’s leading economy based on South Africa’s strategic location? Or was it guided by the expectation that South Africa’s inclusion would provide the group with greater visibility, while Pretoria’s foreign policy positions were largely aligned with those of the BRIC countries, thus posing little risk to the group’s cohesion? How important is the fact that Brazilian, Indian and Chinese policy makers were able to continuously and successfully cooperate with South African negotiators during years of climate negotiations, during which the BASIC grouping (Brazil, South Africa, India and China) was able to show a surprising degree of unity?(Qi, 2011). In the same way, in how far did it matter that Brazilian and Indian policy makers were very well aware of South Africa’s positions after having frequently cooperated since 2003 in the IBSA (India, Brazil, South Africa) framework (Mokoena,2007)?

Far from being a mere additional member of an alreadymature structure, South Africa’s inclusion has fundamentally altered the nature of the BRICS grouping – turning it into a more global alliance with a stronger capacity to speak on behalf of the emerging world (Moore, 2012).

South Africa’s inclusion also underlined the BRIC countries’ long-term commitment to strengthening their presence in Africa, and as an effort to depict themselves as Africa’s partners in the larger context of South-South cooperation. Did South Africa’s inclusion provide the BRICS grouping with such advantages? In the same way,accession to the BRICS had a major impact on South Africa’s role in the global arena, significantly increasing its visibility as part of a global ‘emerging power elite’. Yet did BRICS membership provide South Africa with the expected benefits? Or did it also bring disadvantages, for example by increasing the tension between its commitments to the BRICS grouping and its commitments as a representative of African interests in the global arena? The article is based on a series of interviews with policy makers from all five BRICS countries to provide a more adequate account of South Africa’s accession. By tracing South Africa’s accession to the BRICS grouping and evaluating the impact this move had for both South Africa’s and the BRICS’ strategic standing, the article argues that both sides have gained considerably.

In more general terms, one may argue that the BRICS term served each country’s particular needs of increasing its international status – and this is likely to be why the grouping decided to hold annual summits in the first place. In the eyes of Brazilian, Russian, Indian and Chinese policy makers, the BRIC label seemed to strengthen each country’s status as a dynamic and emerging power with a growing role in global affairs, provides additional legitimacy and authority, and helps them be recognized as such by established powers. Being a BRICs member implies a considerable degree of social recognition – partly provided by the other members but also by Goldman Sachs forecasters and global opinion - which is likely to enhance each country’s individual bargaining power. This was the true thrust behind the first summit in 2009 which turned Brazil, Russia, India and China into de facto representatives of

the emerging world, and indispensable actors in the construction of tomorrow’s global order. The very same reasons led South Africa to seek membership – rightly expecting that BRICS membership would provide Africa’s leading economy additional international recognition as an emerging power.

Yet perhaps more interesting is the question of why the BRIC countries chose to invite South Africa, and not Indonesia, Nigeria, Turkey, South Korea or Mexico.

Several are either bigger economies, have higher growth rates, or both (Patel, 2012). Turkey is nearly double the size of South Africa, Indonesia more so, and Korea and Mexico nearly three times as large. As Jim O’Neill wrote, China's dollar value of GDP is creating the economic equivalent of a new South Africa every four months (O´Neill, 2012).

Indeed, in 2010, when South Africa’s potential membership was discussed, it was clear that economically, South Africa would always remain by far the smallest BRICS member. While it has Africa’s largest GDP, it does not figure among the world’s largest twenty economies and it is a G20 member largely to increase the group’s regional representation and global legitimacy.

In Addition, there is little reason to believe that South Africa will climb up the ranks. If current trends continue, Nigeria -- and one day Egypt and Ethiopia – will challenge and overtake the continent’s leader, and South Africa may very well slip out of the thirty largest economies. The rest of the BRICS, by contrast, are expected to continue their rise and eventually overtake traditional powers. South Africa’s

inclusion, critics have argued, thus threatened the very notion that undergirds and sustains the idea of the BRICS, which allows them to consistently ‘punch above their current weight’. Hence, in addition to its smaller size, South Africa lacks the growth outlook that adds to the other members’ strategic clout.

The entry of South Africa in BRICS allows the country to raise its international status and increase the role of so called "powers" in the emerging new world order, as well as to strengthen its position as a representative of the African continent, as well as possibly increase the inflow of foreign investment into the country.

The inclusion of South Africa was a political maneuver, which further can enhance the power and status of the BRICS formation. Although the new member has the most advanced economy in Africa, in the worldwide list it occupies 31 place, nearly 20 points away from China. The country is also behind other developing countries such as Turkey,Mexico and South Korea, but the African powers are important in geopolitical terms, which gives BRICS presence, influence and trade opportunities on three continents. China is the largest trading partner of South Africa, India and Brazil want to expand its trade ties with Africa.

South Africa needs to take serious steps to significantly accelerate its economic development to keep pace with the other BRICS members.Many South African analysts assert that the BRICS nations could, together, play a political role to counteract the Western countries and allow for developing countries to have a greater voice in international institutions by (i) increasing the likelihood that leaders are chosen from outside of the Western countries, (ii) trading in currency other than the US dollar, (iii) increasing financial regulation and (iv) establishing a stable, reliable, and broad-based international reserve currency system. In reality, however, with such divergent national interests and objectives, politics could obscure the ability of the group to become a real force in global decision-making. As recently as August 2010, BRICS failed to unite to work toward their objective of changing the leadership of global institutions. In the first BRICS meeting in April 2011, the BRICS countries declared that the next chair of the IMF should be selected not based on region but according to competence, marking the first time that a group of developing countries have pressured a leading international organization to select a chief executive who accurately reflects emerging global realties and the rising importance of the emerging economies (Battersby and Lu, 2011), but when faced with the opportunity to unite behind one candidate from the global South for the position of managing director of the IMF, the BRICS countries failed to reach consensus. With the resignation of Dominique Strauss-Kahn, Southern candidates such as South African National Planning Minister Trevor Manuel were publicly endorsed as contenders, but the original BRIC members were content to support and endorse French nominee Christine Lagarde over any candidate from the South. This lack of cohesion does not bode well for the ability of the five countries to provide a united front against the developed states’ dominance of global institutions.

Benefits and Risks of South Africa’s Inclusion in BRICS

Much has been made of both the potential economic benefits for South Africa by becoming a member of BRICS as well as the benefits to the original four members of the introduction of an African member. Some view South Africa’s membership within BRICS as inherently positive, an opportunity to influence policy making and alignment among developing countries to make the international economic system more inclusive (Martins, 2011). This is largely due to the assumption that South Africa will be a representative of the African continent’s interests. To others, however, South Africa is a lightweight in the global economic arena in comparison to the other BRIC members and, despite its trading relationship with China, its membership in the group is unlikely to significantly benefit the other members (Oxford Analytica, 2011). Despite such pessimism, South Africa’s membership in the group is projected to allow the country to promote economic development through enhanced trade and investment and expand sectors in which the country already holds a comparative advantage (Martins, 2011) as well as provide overseas investment opportunities for South African enterprises (Chun, 2011). In terms of African development, Chun (2011) considers the BRICS grouping to be beneficial for expansion of SSA markets, infrastructural development, and trilateral cooperation on the continent. For other BRICS member nations, the benefits of having South Africa in the group include (a) greater representation among developing countries and, perhaps most significantly, (b) increased access to African markets. Chinese Foreign Minister Yang stated that the inclusion of South Africa in the group would promote development among the members and further cooperation among emerging economies (Dubbelman, 2011). While it is not yet clear whether South Africa’s entrance into the forum will help promote such development or facilitate such cooperation, it is evident that a number of risks are associated with its entrance in the group – both economic and political. Questions have arisen over the wisdom of South Africa joining such an exclusive “club” that could potentially entrench the differences in economic size and power between it and the other members (Besada & Tok and Winters, 2013).

At least three broad perspectives can be deduced from the above analysis. First, the BRIC(S) members gave shape to the emergent state category of BRICS partners and near BRICS powers. The latter group includes Indonesia, Turkey, Nigeria, Mexico and possibly South Korea and implies economic power at least, as well as regional influence. Although South Africa seems slightly ill-fitted to the BRICS formation and to be punching above its weight, South Africa clearly regards itself as a regional leader and protector and further sees itself as

representing Africa on global platforms. It also regards itself as a bridge-builder among the great powers and acts through multilateral forums. This concisely underpins and explains South Africa’s membership of BRICS.

Second, the benefit of BRICS membership lies in the access it affords South Africa to opportunities through its many political and economic networks. After all, many analysts (still) believe that China will become the world’s largest economy by around 2030 while the others are important powers in their own right in what is often referred to as the emergence of a new global order, and they all form part of a political drive towards an alternative world order. Yet, it should be clear from the above that the BRICS nations have divergent fortunes, with Brazil and Russia both suffering economically from the decline in global economic activity and related low exports. China, the country considered big enough to carry the rest of the emerging block with its high demand for oil, coal and metal,

has been slowing down in growth and expected to trend at between 5 and 6 per cent in 2020. Only India, which is not a commodity exporter, is showing momentum as an economy. This simply implies that South Africa with its low

economic growth, high levels of poverty and lack of employment opportunities cannot afford to follow an approach of narrow interest in relation to the BRICS formation and to effectively constrain itself by not accepting the advantages of multiple identities in its foreign policy.

Third, any ideological expectation on the part of the South African government that the BRICS formation—with China at the helm—could serve as a counterhegemonic power block or actor vis-à-vis the West is questionable and dubious. It should be clear that Chinese investment is heavily directed towards the big economies of the Western world. Also, the dilemma, as Alexandroff (2015a, 250, 257) argues, is that South Africa’s presumptions about BRICS do not appear to be matching the desires of the other BRICS members. As much as these nations

support the rhetoric of reform and democratisation of global economic governance,there is little evidence that the recent actions of China, Brazil or India are premised on anti-Western rhetoric, and even driven by ideological motivations relating to the creation of a counter-hegemonic alliance in the global order.

Finally, the South African government needs to pay close attention to its pressing domestic challenges and to this end the only way forward is the imperative to formulate a foreign policy vision unconstrained by the limitations of a narrow ideological foreign policy stance. What should be realised is that a constant railing against the US and ‘the West’ undercuts the traditional investors in the South African market. This further means that the South African government needs to consider the opportunities offered by a more nuanced foreign policy crafted on multiple identities. The gist of the argument in this article is that South Africa’s membership of the BRICS formation is indeed an important move to pursue and encompass changing geo-political and economic realities, but the country,literally, cannot afford to abandon or alienate old allies and partners.