The rand will bounce back

Exchange rates do not exist in a vacuum. They are influenced in the long term by economic fundamentals (of several kinds) and in the short term by sentiment (confidence, panic and greed, often at the same time).

The rand’s rate to the dollar just after its recovery from the 2001 rand meltdown was of the order of R7.

The Inflation rate differential between SA and the US (one fundamental) has probably been about 4% each year on average. A decline in the rand’s value for 15 years at 4% compound (to maintain real value parity with R7 in 2001) suggests a rate of about R12 to the dollar if the rand is not to be fundamentally overvalued in 2016.

Minerals recently constituted (as I understand it) about 60% of our exports. So, if demand for our dominant exports decline dramatically (which they have) and therefore demand for rands from foreign customers declines likewise, another fundamental (economics 101) would suggest that a further decline beyond R12/$ is justified. Recent declines in the Australian and Canadian dollars (other resource-exporting countries) signal that about 25% is to be expected. Add more stress for being an emerging economy at the end of quantitative easing, and yet another decline for the Zuma effect, and I don’t find our current weak rand in the least surprising.

On the other side of the equation, when mineral prices and demand improve – which will happen one day – the rand should strengthen, irrespective of Zuma unless other, as yet unknowable, events intervene.

So let’s not get too introspectively downcast. These things happen.

Of course, it does not help that our current government is too internally conflicted to properly pursue the opportunities that have been identified to improve our fundamentals. Or, that our president is economically challenged. But these things too, will pass. Certainly, statements by some that the rand is currently in an irreversible plunge seem unsupported by the facts and greatly overdone.

David Clegg

St James