In recent weeks, the Thai baht, the Czech koruna and the Greek drachma have all attracted unwanted attention from speculators convinced they scented profits among the world's more exotic currencies.
Last year the South African rand, plagued by rumours about President Nelson Mandela's health, would have been a prime target for speculators looking to make a quick killing in the currency markets.
Not any more. South African government bond yields are headed to record lows as the South African Reserve Bank's strategy of keeping interest rates high to smother inflation and buoy the rand pays off.
"The central bank is maintaining a very tight stance which we find quite encouraging, both for the stability of the currency and a reduction in the inflationary risk premium," said Michael Zelouf, director of international investments at Western Asset in London.
The benchmark 12 per cent South African government bond due in 2005 now yields about 14.6 per cent, up from a record closing low of 14.49 per cent on 28 February and down from a high this year of 16.2 per cent at the beginning of the year. Those yields, close to three times as high as those available in European or US government bonds, are proving irresistible to international investors looking to boost the returns on their portfolios.
So far this year, foreign investors have increased their South African government bond holdings by more than R11.4bn rand (pounds 1.6bn). In 1996, net purchases by foreigners were worth just R3.8bn. Trading by foreign investors accounted for about 20 per cent of all trading in South African bonds in the first quarter, more than double their participation a year ago.
"All year we've seen a tremendous amount of offshore buying, both from the US and Europe," said Fran LaMantia, head of fixed-income trading at ABSA Securities in New York. "In the last three days since the Reserve's figures there's been a renewed rush to buy South African bonds." Mr LaMantia sees yields falling to 14 per cent by year-end and 13.5 per cent by this time next year, giving a total return, including reinvested interest, of about 20 per cent.
"We've seen dollars coming in from New York buying rand, which is all bond-related," said Tony van Dyk, a currency trader at First National Bank.
The central bank's gold and foreign currency reserves surged 51.4 per cent in May from April, to R21.8bn rand from R14.4bn. Economists said the surge was due partly to the receipt of R5.5bn rand from the sale of a 30 per cent stake in Telkom.
The rand has remained stable within a 3 per cent trading range against the German mark in the past two months, even as other emerging market currencies came under fire from speculators.
The Thai baht was driven to an 11-year low of 25.675 against the dollar in May, before the central bank jacked up interest rates and limited the supply of baht to overseas investors, making it prohibitively expensive to bet against the currency.
Last month the Czech central bank abandoned a 15-month 7.5 per cent trading band for the koruna, letting it depreciate after traders estimate it had spent $3bn (pounds 2bn) defending the koruna. The Greek central bank spent an estimated $1.6bn successfully propping up its currency last week.
However, Mr Zelouf at Western Asset said: "The rand is an undervalued currency, and shouldn't be affected by the run we've had on those other currencies."
Last year, South African securities were not so appetising. The currency lost about 20 per cent of its value in 1996, hammered by a wave of trade union strikes and the rumours about Mr Mandela's health, before the central bank jacked up rates to 17 per cent.
Since February this year, however, the rand has been steady in a range between about 2.65 and 2.57 to the German mark, and is now at about 2.595. The policy of hanging tough on interest rates has paid off.
With economic growth slumping, however, some investors anticipate a cut in official interest rates, with the growth in the central bank's reserves likely to allay concern about renewed currency weakness. "We're quite positive on bonds, there's potential for them to run some more," said Boetie Toerien, private client fund manager at Fairheads Investment Management in Cape Town.
South Africa's economy contracted at an annual rate of 0.8 per cent in the first quarter, after expanding at an annual 3.3 per cent in the final quarter of 1996. A 34.1 per cent slump in agricultural production punctured growth, which had been expected to rise 1.5 per cent in the quarter. Excluding agriculture, the economy grew 1.4 per cent, perhaps weak enough to prompt lower rates in the coming months.
"Instead of seeing the first cut in November, it's probably been moved up to September," said Louis Rabbets, a trader at Standard Corporate and Merchant Bank.
The government plans to relax some of the exchange controls designed to stop capital flight, allowing South African citizens to open overseas bank accounts from 2 July. While concern about cash pouring out of the country once exchange controls are lifted helped undermine the rand in 1996, traders said next month's changes aren't a concern.
"There shouldn't be a major fear of a capital flight," said Mr LaMantia. "These are retail investors who aren't sophisticated enough to start investing offshore in foreign currencies, although psychologically there might be a bit of rand weakness."
Even at an annual inflation rate of 9.9 per cent, the high returns available on South African securities compared with foreign markets are likely to limit money leaving the country. Copyright: IOS & Bloomberg