Million dollar question
Currency’s future depends on commodities prices
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.