Tourism reaps benefits of wallowing rand
How weak is the rand? Put another way, how competitive is the rand? By my calculation, the currency was at its weakest, most competitive — most undervalued — in late 2001. At R11.98 to the dollar, or a mere 8.3 US cents for a rand, it was selling for about 23% less than its purchasing power parity (PPP) equivalent.
If the dollar-rand exchange rate had merely compensated for differences between higher SA inflation and lower US inflation, the dollar would then have cost no more than R7.70.
It was an expensive time for South Africans to visit New York, and a bargain for Americans and Europeans travelling in SA at that time.
If differences in inflation were the only force driving the exchange rate, we would now (in August 2018) be paying less than R10 for a dollar.
A real exchange rate value of 100 would indicate an equilibrium for foreign traders, one where what is lost on the inflation front is fully made up with exchange rate weakness. The rand has been mostly undervalued since 1995 — the real rand has averaged about 90, or about 10% weaker than PPP on average, and with a wide dispersion about the average.
The past performance of the real rand, moreover, suggests that theoretical PPP exchange rates for the rand are an unlikely outcome. Inflation differences cannot explain the direction the rand takes.
It is much more a case of (unpredictable) changes in the market-determined exchange rates driving inflation higher and sometimes lower, and that lead, rather than follow, the extent of inflation differences between SA and its trading partners.
EXCHANGE VALUE
What then drives the exchange value of the rand? There is surely no strong or rapid tendency for exchange rates to revert to PPP.
The answer is that capital flows to and from SA drive the exchange value of the rand — as they also explain emergingmarket exchange rates generally. The rand mostly follows the direction taken by emerging-market currencies versus the dollar.
Moreover, the potentially helpful effect of a weaker, inflation-adjusted rand on SA exports was overwhelmed by unfavourable export price trends themselves.
Capital flows in when the outlook for the mining sector and economy improves with better prices, and vice versa when the outlook deteriorates and prices fall away
SA exports and imports valued in US dollars grew very strongly, by about three times, between 2002 and 2010.
The prices SA exporters received in US dollars more than doubled over the same period, as is also shown.
The price and volume trends since then have been strongly in reverse, until very recently. The super commodity price cycle came and then went — and the exchange rates went inevitably in the same weaker direction.
Yet, not all has been bad news for SA exporters — especially those supplying foreign tourists, for whom the undervalued rand has proved a great attraction.
The travel statistics of the balance of payments show a dramatic improvement in recent years. Travel receipts from foreigners, measured in US dollars, have been well sustained as payments for foreign travel by South Africans have diminished. SA receipts from travel by foreign visitors are now running at about a $10bn rate that compares relatively well with the value added by the country’s mining industry.
Would it be unfair to say the achievements of SA tourism — extra income, employment created and taxes paid — owe something to the exchange rate, and perhaps as much or more to the helpful absence of any tourism charter? Conventional property rights have been more than sufficient to the purpose of increased supplies.