We’ve been here before
Most business leaders and economists welcome currency’s renewed weakness
THE ALL-IN FOREIGN-EXCHANGE value of the rand fell back to record low territory at the opening of trading on Wednesday, 14 March.
That’s based on the Reserve Bank’s index of the trade-weighted worth of the rand against a basket of 13 major international currencies.
The index slid to 75,22 (2000=100) in early trading. That compares with monthly figures in the 79-80 range for January and February this year. It’s also well over 20% down on the levels of March 2006.
It should be noted, though, that SA has been here before. The average rand index for October 2006, when oil was bubbling over, was 75,92 compared to 97,73 only six months before in April last year.
However, most business leaders, as well as the great majority of economists, welcome the rand’s renewed weakness. They believe it will help exports generally, give more protection against imports and thus be supportive of growth in both real gross domestic product (GDP) and fixed investment.
The broad hope, too, is that even with the latest rand decline, SA’s inflation rate – based on CPIX – should still hold just below, or at worst only narrowly and temporarily above, Government’s 3%-6% target range.
The Bank’s rand index is a permanent reminder of the follies of far too many SA commentators who focus excessively on the rand-dollar exchange rate and the rand-sterling link.
The SA central bank gives the European Union’s euro by far the biggest single weighting (36,4%) in the index. That’s more than double the combined role assigned to the dollar (15,47%) and sterling (15,37%).
Inevitably, of course, the full position is more complex. Dollar pricing of many SA commodity exports and key oil imports has to be factored in.
In pure theory these prices should move up and down to compensate for fluctuations in the global strength of the dollar. In practice, commodity price movements lag behind currency changes, sometimes by an extended period.
But the central fact remains. The euro-rand rate matters vitally to SA from a balanceof-trade and from an inflation perspective. However, further decline in the rand’s forex value is certainly on the cards, although the inherent volatility in floating currencies makes all predictions hazardous.
But there are two crucial points that could tip the rand lower: • The March Quarterly Bulletin from the SARB will be published next week. Marisa Fassler, chief economist of JP Morgan (SA), reckons the already massive deficit on the current account of the balance of payments could well have hit a record level of around 7,8% of GDP in the final quarter of 2006. That is proportionately higher than the traditional red-number countries, the United States (-6,1%) and Australia (-5,0%) and is exceeded only by Spain (-8,5%). Among all the consequential emerging market nations, none ranks with SA in the relative size of the deficit except Turkey (-7%). • With world markets jittery generally, there’s concern particularly about emerging market countries with big BoP current account deficits. This is a reflection of much wider nervousness, relating to such issues as terrorism and the re-emergence of expropriation of foreign assets, led by oil-powered populist Hugo Chavez of Venezuela. SA’s approach to the mining industry has long been seen as veering too close to a quasiexpropriational stance. That is hardly conducive to overseas rand support when added to the BoP situation, the return of Zimbabwe to “shock horror” world headlines and the great unknown about who will succeed Thabo Mbeki to the SA Presidency.
That said, the critical question is whether a further significant fall in the rand on forex markets would harm SA. Might such a development actually prove beneficial overall? A case can clearly be made for that view. Many of the most successful economies – especially in Asia in recent decades, but West Germany in the Fifties and Sixties was also very much an instance – have enjoyed long periods of high growth on the back of “undervalued” currencies.
There was panic in many quarters – Mbeki even set up a special commission to probe conspiracy allegations – when the rand fell through the floor in the closing months of 2001. But the SA economy boomed off the back of the cheap rand and got exactly the trade boost needed.
But be careful of assuming that if that medicine worked then it’s just what’s needed now – a painless route to sustained or higher growth. Currency depreciation does fuel inflation and that has to be met somehow.
In East Asia and the old West Germany, exceptionally rigorous monetary policy and the priority of exports over domestic consumption (and thus immediate living standards) was the answer.
But is SA, politically, socially and industrially, prepared for that?
BoP deficit is getting even bigger. Marisa Fassler