Continued weakening of the Rand and grim recovery outlook, could help the local South African outsourcing industry establish itself as a cost-effective destination for outsourcing contracts and, subsequently, attract more engagements to the country.

In the last two years, the South African Rand has been on a constant decline against the USD. This decline has peaked since 2014/15. The Rand closed at a level of ZAR15.98 to the USD for the week ending February 5, 2016. During the same month in 2015, the currency was trading close to ZAR11 to the USD.

One of the major factors affecting Rand valuation is the improvement in the US economy and expectations of rate hikes in the coming quarters by the Federal Reserve. Another factor for the depreciation is the Chinese flexible foreign policy. The Rand is one of the currencies most exposed to China, hence any adjustments to Chinese foreign policy has a direct impact on the Rand. After People’s Bank of China devaluated the Yuan by 2% in mid-2015, the Rand lost close to 26% of its value during the next six months.

The story is not all grim when it comes to impact on industries though. One of the industries at an advantage of the depreciating Rand is tourism. The weakening of the Rand has also helped the wine industry. Business Process Outsourcing (BPO), too, has been a beneficiary of the Rand’s depreciation. The weakening of the Rand has positioned South Africa as a cost-competitive outsourcing destination for companies based outside of the US and Europe. Added to these advantages is the fact that South Africa has a large number of law graduates, much higher, in fact, than in India, Philippines and Ireland.

Looking ahead, the outlook around the Rand’s recovery in the medium term remains grim till the end of end of 2017. While the importance of rand depreciation is a temporary advantage for South Africa, just like most short-term incentives, those service providers that are capable of retaining clients, expanding scope and automating a number of processes, this depreciation could be a critical attraction for the next 30-month period until 2018.

Report by Deloitte