Skit­tish lit­tle buck looks weary

Over the decades, the rand hasn’t al­ways done what you might have ex­pected, but are there still any sur­prises left?

Financial Mail - Investors Monthly - - Guest Column -

In mid-Novem­ber, the rand tum­bled to fresh lows of R14,43/US$. Since 1982, the rand has de­pre­ci­ated by 95% against the green­back. Since the ad­vent of democ­racy in 1994, the loss has now been 75%.

Given the rand’s some­what pre­dictable per­for­mance over the long run, it is some­times sur­pris­ing to hear peo­ple ask­ing about expectations for its value. Equally, there are ques­tions over whether it’s bet­ter for the rand — or any cur­rency — to be strong or weak.

The an­swer, in a nut­shell, is that the pre­ferred cur­rency is one that re­mains rel­a­tively stable over the long term. This re­duces risk and fa­cil­i­tates suc­cess­ful plan­ning of projects and strate­gies.

A cur­rency that per­pet­u­ally de­pre­ci­ates means ever-in­creas­ing prices for im­ports, in­clud­ing tech­nol­ogy. All things be­ing equal, a cur­rency ad­justs to re­flect a coun­try’s rel­a­tive terms of trade. So, if SA’s ex­ports be­came highly com­pet­i­tive, the rand would tend to strengthen.

But the op­po­site has been the long-term trend for SA: ex­ports have be­come less com­pet­i­tive and have been sup­ported by a weak­en­ing rand, while im­ports have be­come more ex­pen­sive.

The great­est fac­tor in de­ter­min­ing cur­rency value over time is the is­sue of cer­tainty.

So what has the rand done in the long run? From its in­cep­tion in 1961 through to 1982, a rand cost $1,40. For decades, it was one of the world’s strong­est cur­ren­cies, backed by do­mes­tic gold pro­duc­tion and un­mined re­serves.

But af­ter gold out­put be­gan fall­ing from record highs in 1970, and un­der grow­ing po­lit­i­cal pres­sure, the rand broke par­ity with the dol­lar in March 1982. It soon cost more than R1 to buy a dol­lar and, by Fe­bru­ary 1985, a dol­lar cost R2.

Then when PW Botha made his in­fa­mous Ru­bi­con speech in Au­gust 1985, a dol­lar cost R2,40. It slowly slid fur­ther over the next few years as pres­sure built on the apartheid gov­ern­ment.

By Novem­ber 1992, a dol­lar cost R3 and af­ter the first demo­cratic elec­tions in 1994 it was R3,60. Dur­ing 1996, there was a “sell-off” of the rand: the cur­rency lost 20% of its value, fall­ing to R4,50.

Around Septem­ber 1997, when the so-called Asian con­ta­gion gripped global mar­kets, the rand lost an­other 20%, be­fore firm­ing again in 1999 to trade be­tween R5,50 and R6,40 to the dol­lar.

When Thabo Mbeki was in­au­gu­rated as pres­i­dent in 1999, the rand broke through R6/$ and it started the new mil­len­nium at around R6,12/$.

In De­cem­ber 2001 it fell to R13,84/$. That record stood un­til Septem­ber 2015.

A com­mis­sion was ap­pointed to look into the cur­rency col­lapse and within months the rand was again be­low R9/$. By the end of 2004, a dol­lar cost a more mod­est R5,70.

There was am­ple cir­cum­stan­tial ev­i­dence of delin­quency in the mar­ket, but the hear­ings were ter­mi­nated pre­ma­turely and none of the cul­prits faced pun­ish­ment.

This year’s cur­rency weak­ness is based on fun­da­men­tals, re­flect­ing de­te­ri­o­ra­tion in SA’s terms of trade. And gov­ern­ment lacks any dis­cernible poli­cies aimed at sup­port­ing a stable rand.

This is de­spite the fact that the con­sti­tu­tion says the SA Re­serve Bank’s man­date is “to pro­tect the value of the cur­rency in the in­ter­est of bal­anced and sus­tain­able eco­nomic growth”.

Over 33 years, the rand has fallen from $1,40 to $0,07, a de­cline of 95%.

In 2013, Mor­gan Stan­ley de­clared the rand one of the “frag­ile five” cur­ren­cies, along with the Turk­ish lira, In­dian ru­pee, In­done­sian ru­piah and Brazil­ian real. Then in Au­gust 2015, the fi­nan­cial ser­vices firm in­cluded the rand as one of the “trou­bled ten”.

This history needs to be con­sid­ered in in­vest­ment de­ci­sions.

There’s pro­tec­tion in a port­fo­lio of listed stocks that gen­er­ate rev­enue in hard cur­ren­cies or which own in­come-pro­duc­ing as­sets in “hard cur­rency na­tions”.

The list of rand hedges in­cludes in­dus­tri­als such as Naspers, Stein­hoff, Richemont, MTN and SABMiller or re­sources shares such as BHP Bil­li­ton, Mondi and An­gloGold Ashanti. It also in­cludes property com­pa­nies such as Cap­i­tal & Coun­tries and Re­de­fine In­ter­na­tional as well as those earn­ing hard cur­rency, in­clud­ing Dis­cov­ery, Medi­clinic and Datatec.

Qual­ity lo­cal property is an­other op­tion. Even in Harare, well-main­tained res­i­den­tial units showed strong value af­ter the melt­down of Zim­babwe’s once-pros­per­ous econ­omy.

The rul­ing ANC and gov­ern­ment lack any dis­cernible poli­cies aimed at sup­port­ing a stable rand

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