Rand a proxy for sentiment on SA

THE rand is, in a way, the share price of SA Inc, reflecting investors’ perceptions of how the country is faring. So when the unit plunges as it did this week to a fresh 13-year low against the dollar, and a record low against the pound, we should take note. In an uncertain and volatile world, investors are reminding us that SA’s economy is not what it should be and that our failure to put into effect the reforms needed to make the economy more investor-and growth-friendly is making SA vulnerable.

However, this week’s currency gyrations were more about global than local factors. The rand dropped through the R20/£ barrier, a level it hadn’t reached even during the December 2001 crash, when it hit a low of R19.85/£ and R13.85/$ — a level we haven’t seen again, although the rand dollar rate this week hovered around R12.80.

Many now expect the US Federal Reserve (Fed) to implement its first rate hike next month; this week’s hawkish comments by Atlanta Fed president Dennis Lockhart prompted another round of emerging market currency weakness. Although he spoke for himself, saying it would take a significant deterioration in the US economy for the Fed not to hike in September, Mr Lockhart’s comments and the markets’ response to them are a concern.

It is still unclear how much of the Fed’s next move has been priced in by the markets, and if the rand reacts as it did this week to one Fed member’s hawkish comments, chances are that when the Fed really does hike, we could see more weakness.

Today’s US employment data will be important in signalling how well the US economy is doing, as that would offer an indication of the Fed’s likely move.

This week’s rand rout against the pound was, however, driven by expectations that the UK’s monetary policy committee would be hawkish when it met yesterday. In the event, its tone was reasonably dovish, and that helped the rand head back closer to R19.85.

But the Bank of England is still expected to raise interest rates next year. And Investec economist Annabel Bishop headed her currency note yesterday “R20 and beyond”, a reminder that it was the first time ever that the rand went below 5 pence.

This is scary stuff. But, amid the gloom, there has been some good news, with SA having posted a trade surplus for the second consecutive month. The surplus widened to R5.8bn in June from R4.9bn in May, which was better than expected. This raises the prospect that SA will post its first quarterly trade surplus since 2011, say Barclays economists Peter Worthington and Miyelani Maluleke, and that points to a “markedly better” surplus on the current account of the balance of payments of 3.5% of GDP in the second quarter, down from 4.8% in the first quarter.

A lower current account deficit makes the rand less vulnerable — Standard Bank’s economists estimated recently that the rand exchange rate was more sensitive now to the current account deficit than it had ever been. But the figures also suggest that SA’s imports and exports are responding, at least to some extent, to the weakening rand. That bodes well — and policy makers and exporters should look to anything that could enhance our ability to take advantage of a weak currency to boost exports.

Amid this currency weakness it is worth remembering the useful role that a floating exchange rate plays in acting as a shock absorber during volatile periods. At least we are not Greece — they are tied to the euro and don’t have a weak currency that could help rebalance their economy. SA has the advantage of the rand taking at least some of the strain, and transmitting the necessary signals to the economy.