To keep your fortune, rather stay at home
What inflation adds by way of higher prices, revenues or incomes, weaker exchange rates can be expected to shrink in value abroad. If the move in exchange rates were equal to the difference in inflation rates between SA and its foreign trading partners, the fields on which we work or play across the globe would be level.
Clearly economic life does not work that way. Our rand has almost always bought us more at home than it does abroad. The difference can be calculated as that between the market rate of exchange and its purchasing power equivalent, as determined by the differences in inflation rates.
Since December 2010, when a US dollar cost R6.61, consumer prices in SA have increased on average 58%. In the US average prices were up by a mere 16%. If the exchange rate had moved strictly in line with the changing ratio of consumer prices in the two economies (158/116, or 1.36) the dollar would have moved from R6.61 to R9 in August 2019 (9/6.61 = 136). A weaker exchange rate of R9/$ would have levelled the playing field.
The year 2010 is a good starting point for such a calculation. The rand then was very close to its purchasing power parity (PPP) equivalent were you to use 1995 as a starting point. In 1995 the rand became subject to largely unrestrained capital flows. Until then the (commercial) rand had traded consistently close to its purchasing power value.
The reality is that exchange rates are determined by forces that may have little to do with actual price changes in the markets for goods and services. They move in response to global capital flows which can dominate the flows of currency, rather than to the flows of exports and imports, which are price-sensitive to a degree.
As a particular economy becomes more risky, capital tends to flow away and exchange rates weaken and interest rates rise to balance supply and demand for the local currency. And if the shocks to the exchange rates are sustained, the inflation rate will respond as the prices paid for imported and exported goods in the local currency increase or decrease — but with a time lag. This determines the degree to which exchange rates diverge from PPP. The exchange rate leads and inflation follows — not the other way around — as theory might have had it. And convergence to PPP equivalent may take a long time.
Converting your SA wealth or income from rand into the equivalent purchasing power in the US at August month end would therefore have required the following adjustment: to reduce the $6.60 received for R100 at market exchange rates by about 60%, this being the ratio 9/15.2. Having to pay only R9 for a dollar would have been enough to net out the inflation impact, rather than the R15.20 you actually had to give up for an extra dollar to spend in New York (9/15.2*6.6 = 3.9).
In other words what would be regarded as a substantial fortune of R100m in SA would have provided a mere $4m of buying power in the US. Not enough to live well — or not nearly as well — as you could live in SA off your capital.
This purchasing power discount (((6.6-3.9))/6.6)*100= 40% at August month end) is a significant deterrent to the relocation of wealthy and skilled South Africans with only the SA currency to support a lifestyle in the developed world.
Mobile younger South Africans, with a life of earning income and opportunities for saving ahead, could make the same calculation: multiply the prospective hard currency salaries abroad, when measured in exchange rates, by about six/tenths to account for their lesser purchasing power.
We should be relying more on economic fundamentals than on an undervalued exchange rate to keep capital at home, especially human capital. If SA could play the economic growth cards more effectively and reduce its risk premium, it would retain and attract more capital on better terms.