Last week news reports came out that Standard Chartered Bank had agreed a settlement with the Competition Commission of South Africa to pay a fine of ZAR43 million in relation to accusations of foreign exchange manipulation between the years of 2008 and 2017.
This case had originally been brought against 27 banks including Standard Chartered, Barclays now known as ABSA, FNB, Nedbank, Citibank and many other mainly international banks. The case alleged that the 27 banks were colluding to manipulate the Rand foreign exchange rate against the Dollar in a bid to make undue profits.
In 2017, Citibank agreed to a fine of ZAR63 million. In March 2023, the Competition Commission passed a judgement finding these banks guilty of manipulation of the Dollar/Rand exchange rate but since then, all of the banks have been appealing and objecting to the judgement; with this admission of guilt by Standard Chartered Bank breaking the ranks.
As a result, we have seen commentators in South Africa call for much harsher action against the banks, the employees, the bank management and its boards. Numerous political parties including ANC and EFF have also called for criminal cases to be brough against the banks. The fall out from this case is only beginning.
Why is this important to the South African economy?
In short, the foreign exchange rate of any country especially to the US Dollar is very important as it is a factor in a lot of other economic fundamentals. Because most imports are purchased in dollars, it means the exchange rate has a direct effect on prices of goods in the economy i.e. if your currency is weakening against the dollar, the price of goods may have stayed the same wherever you’re purchasing them from, but they would have gotten more expensive to you locally because of a higher exchange rate. A simple example is that when purchasing petrol for the economy, the $90 a barrel of 10 years ago may have been P720 at a rate of BWP8 to $1 but now would be BWP1,080 at a current rate of BWP12 to $1.
Therefore all else equal, your local cost of petrol would have changed 50% just on exchange rate movements. Therefore the exchange rate is incredibly important in determining inflation and cost of living which then feeds into interest rates which then increases cost of loans which then continues to eat into the pockets of the general citizenry. So in short, banks manipulating foreign exchange rates has a very direct impact on the lives of ordinary South Africans. It should be stated that during that period the Rand went from around ZAR8 to $1 to ZAR18 to $1.
So are the banks to blame for the depreciation of the Rand?
No. The Rand as a free floating market currency will have its value determined by fundamentals of the economy and general international sentiment. What the manipulation by the banks would have been doing is taking advantage of very short term movements in the exchange rate. None of this manipulation would have been able to move the exchange rate permanently but rather would imply that at different intervals the rate maybe went too high or too low or stayed at a particular position for too long so as these banks could take momentary advantage of these movements. (I have seen quotes saying the banks would have made trillions of rands off these manipulations. I don’t believe that number though over a 10 year period that might be fathomable. I also think the trillions mentioned are related to sizes of trades not profits made).
Why is this important to Botswana?
The Botswana Pula is not a free floating currency that reflects sentiment on the Botswana economy. It is rather a weighted average basket of currencies with the Rand being the largest component at 45%. What this implies is as the Rand is weakening (or being manipulated) this feeds straight into the Pula. This implies that those bank manipulations affected our economy too especially in regards to the fact that Botswana imports more than 90% of consumables. This means that any given time, a company importing something could have been paying a manipulated price rather than what that price should have been. Just like in South Africa though, my opinion is that these would have been momentary distortions rather than distortions that would have moved the value of the Pula over extended periods of time or contributed to the depreciation of the Pula over time.
Is it possible that the Pula has also been manipulated over this period?
Having worked in a Bank Treasury where foreign exchange was traded and having heard how the banks in SA were carrying out the manipulations, my educated guess is that it was very possible that our local banks could have also been gaining profits over temporary market manipulations. This is not to say it was happening and in the time I sat in the dealing room I saw no evidence suggesting it was happening but it isn’t impossible. It is important to note that Bank Treasuries are a very small group of people who in most cases know each other. In order to trade the Dollar against Pula, a local trader in most instances has to make a guess on what happens on the Dollar/Rand. This means most of the local traders are constantly communicating with Dollar rand traders in South Africa, Dubai and London, trying to figure out which direction the currency will go. In fact, on a daily basis, traders across the world exchange intelligence that even gets fed to clients on expected direction of currencies. It is therefore not unfathomable that if a multinational bank was participating in manipulating the Dollar rand, they may have extended the “courtesy” of that market manipulations to a Botswana trader of the same bank to make profits off expected manipulations that would feed into the Pula.
This would mean that the Bank of Botswana needs to follow up with the Competition Commission of South Africa and establish whether during these times of known market manipulations, there wasn’t evidence of unusual trading in the Pula currency markets. It is very possible that this could be the case though I never witnessed anything that would imply it was actually happening.
If it does come to light that the Pula was also manipulated, it is important that fines and criminal cases are brought against the specific banks, the traders, executives and potentially the board members.
*Mphoeng is a director at MP Consultants, a local citizen-owned corporate finance, economics and business consultancy. Previously, he worked for the University of Botswana as a Lecturer in Accounting and Finance, Botswana Investment Fund Management (BIFM), Standard Chartered Bank and Bank of Botswana.
In 2017, Citibank agreed to a fine of ZAR63 million. In March 2023, the Competition Commission passed a judgement finding these banks guilty of manipulation of the Dollar/Rand exchange rate but since then, all of the banks have been appealing and objecting to the judgement; with this admission of guilt by Standard Chartered Bank breaking the ranks.
As a result, we have seen commentators in South Africa call for much harsher action against the banks, the employees, the bank management and its boards. Numerous political parties including ANC and EFF have also called for criminal cases to be brough against the banks. The fall out from this case is only beginning.
Why is this important to the South African economy?
In short, the foreign exchange rate of any country especially to the US Dollar is very important as it is a factor in a lot of other economic fundamentals. Because most imports are purchased in dollars, it means the exchange rate has a direct effect on prices of goods in the economy i.e. if your currency is weakening against the dollar, the price of goods may have stayed the same wherever you’re purchasing them from, but they would have gotten more expensive to you locally because of a higher exchange rate. A simple example is that when purchasing petrol for the economy, the $90 a barrel of 10 years ago may have been P720 at a rate of BWP8 to $1 but now would be BWP1,080 at a current rate of BWP12 to $1.
Therefore all else equal, your local cost of petrol would have changed 50% just on exchange rate movements. Therefore the exchange rate is incredibly important in determining inflation and cost of living which then feeds into interest rates which then increases cost of loans which then continues to eat into the pockets of the general citizenry. So in short, banks manipulating foreign exchange rates has a very direct impact on the lives of ordinary South Africans. It should be stated that during that period the Rand went from around ZAR8 to $1 to ZAR18 to $1.
So are the banks to blame for the depreciation of the Rand?
No. The Rand as a free floating market currency will have its value determined by fundamentals of the economy and general international sentiment. What the manipulation by the banks would have been doing is taking advantage of very short term movements in the exchange rate. None of this manipulation would have been able to move the exchange rate permanently but rather would imply that at different intervals the rate maybe went too high or too low or stayed at a particular position for too long so as these banks could take momentary advantage of these movements. (I have seen quotes saying the banks would have made trillions of rands off these manipulations. I don’t believe that number though over a 10 year period that might be fathomable. I also think the trillions mentioned are related to sizes of trades not profits made).
Why is this important to Botswana?
The Botswana Pula is not a free floating currency that reflects sentiment on the Botswana economy. It is rather a weighted average basket of currencies with the Rand being the largest component at 45%. What this implies is as the Rand is weakening (or being manipulated) this feeds straight into the Pula. This implies that those bank manipulations affected our economy too especially in regards to the fact that Botswana imports more than 90% of consumables. This means that any given time, a company importing something could have been paying a manipulated price rather than what that price should have been. Just like in South Africa though, my opinion is that these would have been momentary distortions rather than distortions that would have moved the value of the Pula over extended periods of time or contributed to the depreciation of the Pula over time.
Is it possible that the Pula has also been manipulated over this period?
Having worked in a Bank Treasury where foreign exchange was traded and having heard how the banks in SA were carrying out the manipulations, my educated guess is that it was very possible that our local banks could have also been gaining profits over temporary market manipulations. This is not to say it was happening and in the time I sat in the dealing room I saw no evidence suggesting it was happening but it isn’t impossible. It is important to note that Bank Treasuries are a very small group of people who in most cases know each other. In order to trade the Dollar against Pula, a local trader in most instances has to make a guess on what happens on the Dollar/Rand. This means most of the local traders are constantly communicating with Dollar rand traders in South Africa, Dubai and London, trying to figure out which direction the currency will go. In fact, on a daily basis, traders across the world exchange intelligence that even gets fed to clients on expected direction of currencies. It is therefore not unfathomable that if a multinational bank was participating in manipulating the Dollar rand, they may have extended the “courtesy” of that market manipulations to a Botswana trader of the same bank to make profits off expected manipulations that would feed into the Pula.
This would mean that the Bank of Botswana needs to follow up with the Competition Commission of South Africa and establish whether during these times of known market manipulations, there wasn’t evidence of unusual trading in the Pula currency markets. It is very possible that this could be the case though I never witnessed anything that would imply it was actually happening.
If it does come to light that the Pula was also manipulated, it is important that fines and criminal cases are brought against the specific banks, the traders, executives and potentially the board members.
*Mphoeng is a director at MP Consultants, a local citizen-owned corporate finance, economics and business consultancy. Previously, he worked for the University of Botswana as a Lecturer in Accounting and Finance, Botswana Investment Fund Management (BIFM), Standard Chartered Bank and Bank of Botswana.
