We’ve been here be­fore

Most busi­ness lead­ers and economists wel­come cur­rency’s re­newed weak­ness

Finweek English Edition - - Economic trends & analysis - BY HOWARD PREECE howardp@fin­week.co.za

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


Source: Ned­bank

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