Mil­lion dol­lar ques­tion

Cur­rency’s fu­ture de­pends on com­modi­ties prices

Finweek English Edition - - Cover -

THE RAND’S RE­CENT gy­ra­tions brought back mem­o­ries of De­cem­ber 2001, when the rand reached its weak­est level of US$1/R13,85. At more than US$1/R11 on 23 OC­TO­BER 2008, the ques­tion arose whether a re­peat of the 2001 cri­sis was tak­ing place. Some economists be­lieve SA’s econ­omy will be worse off this time around than in 2001.

On a trade-weighted ba­sis, the rand has al­ready been worse than in 2001. T-Sec econ­o­mist Mike Schüssler says the rand has lim­ited scope for mean­ing­ful re­cov­ery. He ar­gues the main dif­fer­ence be­tween the 2001 cur­rency cri­sis and the cur­rent one is the global eco­nomic back­drop. The world was also un­der­go­ing a down­turn in 2001, but this time it’s much worse. Banks in the world’s rich­est coun­tries have been tee­ter­ing on the brink of to­tal col­lapse, ne­ces­si­tat­ing hun­dreds of bil­lions of US dol­lars in cap­i­tal in­jec­tions from gov­ern­ments and tril­lions in guar­an­tees for de­posits.

It will take time for the world’s bank­ing sys­tems to re­cover. Mean­while, the real economies of the rich coun­tries – as well as those emerg­ing mar­kets that ex­port to them – are suf­fer­ing. The root cause of the prob­lem is the burst­ing of the hous­ing bub­ble, which is pre­vent­ing the US con­sumer – long the en­gine of global growth – from spending as be­fore.

An­other dif­fer­ence be­tween this cur­rency “cri­sis” and the pre­vi­ous one is that the 2001 sell-off of the rand occurred on the eve of a fall in the US dol­lar and a ma­jor bull run in com­modi­ties prices. From 2002, the dol­lar sagged as the world fo­cused its at­ten­tion on the big cur­rent ac­count deficit in the US. At the same time, com­modi­ties prices roared up­wards in what many de­scribed as a su­per­cy­cle.

The Econ­o­mist mag­a­zine’s weekly com­mod­ity price in­dex rose by 190% be­tween the start of 2002 and end-Fe­bru­ary this year. That com­modi­ties price boom, plus the weaker US dol­lar, helped the rand to strengthen be­tween 2002 and 2005. When the rand did weaken from 2006, the com­modi­ties price boom put a lid on the de­pre­ci­a­tion.

Now talk of the com­modi­ties su­per-cy­cle has waned while the prices of SA’s big ex­port com­modi­ties have tum­bled. The platinum price has nose-dived more than 60% from the highs reached in March to lev­els be­low US$900/ oz. The gold price has plum­meted about 27% from its highs of more than $1 000/oz reached in mid-March. Gold and platinum are SA’s main ex­ports, to­gether ac­count­ing for around 20% of to­tal ex­ports. On the plus side, oil prices have also fallen sharply, from peaks of around $145/bar­rel in July to be­low $70/bar­rel at the time of writ­ing.

The mil­lion-dol­lar ques­tion now is whether you be­lieve com­modi­ties prices have fur­ther to fall. Schüssler says: “If you be­lieve that com­modi­ties prices are go­ing to con­tinue to fall you can’t be too op­ti­mistic about the rand’s chances for fur­ther re­cov­ery. SA will have bal­ance of pay­ments prob­lems for the fore­see­able fu­ture – and that doesn’t bode well for the rand.”

There will be some ben­e­fits to the BoP from lower oil prices, which ac­count for around 19% of SA’s im­ports. But that’s over­shad­owed, Schüssler says, by SA’s de­pen­dence for ex­port earn­ings on com­modi­ties.

All isn’t doom and gloom. Ned­bank econ­o­mist Den­nis Dykes says the rand’s de­pre­ci­a­tion will make im­ports less at­trac­tive, which will help the BoP. That ef­fect will be aided by de­fla­tion­ary in­ter­na­tional con­di­tions, which will see the prices of some im­ports drop in for­eign cur­rency terms.

Bureau for Eco­nomic Re­search (BER) econ­o­mist Pi­eter Laub­scher is much more op­ti­mistic about the rand than is Schüssler, say­ing the cur­rency will re­cover from its de­pressed lev­els to around US$1/R9. The BER is as­sum­ing an ex­change rate of US$1/R9,20 by year-end 2009. “There’s been an over­re­ac­tion. The rand will move back to R9. This isn’t an out­right bal­ance of pay­ments cri­sis ne­ces­si­tat­ing action from the au­thor­i­ties,” Laub­scher says.

Dykes is re­luc­tant to pre­dict the rand’s for­tunes “while we’re in the mid­dle of panic con­di­tions. It’s eas­ier to say where the rand should be than where it will be. A re­al­is­tic level for the cur­rency would be R8,50, which would still be the­o­ret­i­cally un­der­val­ued.”

One thing economists agree on is that SA Re­serve Bank Gov­er­nor Tito Mboweni shouldn’t hike in­ter­est rates to fight inflation. The inflation threat from the weak rand is some­what coun­ter­acted by the fall in the oil price, but that won’t be enough to save SA from some in­fla­tion­ary ef­fects. Still, rais­ing in­ter­est rates would end up push­ing SA’s econ­omy into re­ces­sion, economists say.

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