SA not drifting alone in economic eddy
The headlines about the latest slide in the rand don’t make for pretty reading. It seems the initial trigger was last week’s terrible GDP data, which may or may not be a precursor to a more prolonged slowdown, something we can ill afford.
When these episodes of rand weakness happen they tend to elicit a popular but misguided reaction — that it’s something that should worry only the relatively wealthy, those who tend to travel and consume more imported goods.
This, of course, ignores the inflationary effect more broadly and the likely resulting spike in the price of essential commodities, such as maize, which are priced in dollars.
They also present a headache for policy makers, from the South African Reserve Bank to the presidency, though they are unlikely to be seen offering running commentary on a daily basis.
A glimpse at what happened in Turkey, where the central bank had to increase its main interest rate by 125 basis points to a staggering 17.75%, shows the real-life consequences of currency volatility.
It seems a lifetime ago that the Reserve Bank was cutting interest rates and describing the rand as overvalued. And yet that was only a little more than two months ago. With Turkey’s elections due later in June, things may get a bit more bumpy still. While we’ve been basking in so-called Ramaphoria since the tail-end of 2017, when Cyril Ramaphosa took control of the ANC and then became president in 2018, the statistics that really matter have been rather grim.
Irrespective of what measure you look at, unemployment is at the sort of crisis level which, as Financial Mail deputy editor Sikonathi Mantshantsha points out, has been known to fuel revolutions elsewhere.
It is in this context that a weaker rand has broader implications than the ability of the middle class to travel abroad. If it’s entrenched, it’s almost guaranteed to result in even more punishing increases in the price of fuel, with a knock-on effect on other staples. An increasing cost of living combined with a lack of employment-generating growth is not a happy combination for any country. Who would be president?
Yet, while I’m not sure how much comfort we should be taking from this, we are far from being unique in having reasons to be pessimistic.
Attending a conference in Portugal last week, it took just a few days to get a sense of how bad things are in Europe, traditionally among our most important trading partners and sources of investment.
In the UK, Brexit becomes more farcical by the day, and the prospect of the country crashing out of the EU without a replacement deal is increasing all of the time. Rather than negotiating with their partners, ministers are fighting among themselves and the prime minister seems to be clinging to power only because nobody else wants to take ownership (and blame) when the true costs of Brexit become apparent to the population at large.
Nationalism and xenophobia are on the march from Poland to Italy, with the latter once again flirting with exiting the euro. Its recent elections produced a government of leftand right-wing populists, who may well be reckless enough to try it. Even Greece, at the height of its debt crisis, when it seemed to have nothing to lose, still decided that the cost of leaving the euro would be too high and eventually agreed to go along with the EU’s austerity demands.
While there were some outlandish theories about how jettisoning the euro would usher in a new era of policy independence and a rush of tourists that would magically fix the country’s problems (they obviously hadn’t been keeping an eye on Argentina), most people understood that converting their savings into a new and most likely valueless currency would be catastrophic. It beggars belief that the eurozone’s third biggest economy is now governed by politicians who would even consider this as an option.
Spain injected some positive headlines through the inauguration of a female majority cabinet, but that doesn’t change the fact that it is a minority government that may not last, and is haunted by massive economic challenges, including a youth unemployment rate north of 30%. In short, the world doesn’t seem to be a happy place at the moment.
An interesting story in the Financial Times recently detailed how some of the hedge funds that have been battered in recent years after their bets on financial market collapsed are now generating positive returns again. This would seem to indicate that their bearish views are gaining currency and the market dislocation we are seeing may not be a once-off.
In this context it should hardly be a surprise to see the rand and the South African economy being hit. Nor does it seem to be an environment in which one can count on Ramaphosa’s plan to “hunt down” $100bn of foreign direct investment. It is time for a home-made plan, the quicker the better.
NATIONALISM AND XENOPHOBIA ARE ON THE MARCH FROM POLAND TO ITALY, WITH THE LATTER ONCE AGAIN FLIRTING WITH EXITING THE EURO