Weak rand offers SA a keen advantage
Household spending patterns are widely expected to change permanently in the wake of the lockdown. How they change is of overwhelming importance to almost all businesses that supply households or are once, twice or even three times removed from making sales directly to households.
The demand to fly to some holiday destination not only affects hotels, B&Bs, restaurants, airports, travel agents, airlines, car rental companies and taxi companies — and all they employ or contract with — it will have profound implications for Boeing and Airbus and all their component suppliers.
Household spending accounts for 60% of all spending in SA, and 70% in the US and other developed economies. Without the control and command of governments (very active in the lockdowns), the decisions of households to spend or save or borrow to spend always moves the economy in one direction or another. The market place after Covid-19 will make the same call on its suppliers to adapt profitably to changing tastes and to innovate. That is, to lead household spending to their own portals, real or virtual, depending on what works best.
There is every reason for governments and their central banks to ameliorate the economic damage of their own making and offer compensation for the loss of incomes from work, including the losses of business owners. Governments also have every reason to encourage demand for all goods and services when they allow firms after the lockdown to do what comes naturally to them: freely compete for custom and the resources, labour, capital and premises to help them do so. There is no more reason for governments to get involved in picking post-Covid business winners or losers than they would have at any other time.
They should aim to leave future taxpayers with as small a burden of interest to pay on the additional government debt that is being incurred because of extra spending and declining tax revenues. Printing money rather than issuing expensive debt (when it is as expensive as it is for the SA taxpayer) makes good sense. The inflation in SA that might ordinarily come with money creation is a long way away — until supply and demand, both so damaged by the crisis, recover to something like their potential.
They say no crisis should be wasted. This crisis does provide an opportunity to stimulate what would be a most helpful source of growth for SA: growth led by exports and import replacement. The much weaker rand has made SA potentially far more competitive than it was only a few months ago. Adjusted for differences between SA and US consumer price inflation, at R17.50/$ the rand is now about 50% undervalued and about 18% more competitive with the US exporter or importer than it was at year end. A purchasing power equivalent dollar would now cost no more than R8.70.
There is a strong case for retaining this competitive advantage. It is easy to inhibit exchange rate strength should it materialise. The Reserve Bank can buy dollars with the rand it has an unlimited supply of. The Swiss National Bank does this all the time to hold back the Swiss franc. Also, buying dollars with rand would add to the supply of rand — it would be another form of money creation, and helpful when every extra rand can encourage the spending and lending that is so urgently needed for the recovery. Preventing exchange rate weakness should never be attempted.
There should be two objectives for exchange rate policy during and after the crisis. First, should the opportunity present, to inhibit rand strength and encourage domestic production and consumption, especially since inflation will be looking after itself well enough and interest rates do not need a stronger rand to decline further. The weak domestic economy is reason enough for still lower interest rates. Second, and a much more difficult longerterm exercise, to seek ways to inhibit the exchange rate volatility that is such a burden on foreign trade.
Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.