Rand is currency of contention
Weakness could be good, bad or inconsequential
THE rand continued its tumble to multi-year lows this week, hitting R10.36 to the dollar and bringing the currency’s depreciation so far this year to 21%. But economists and analysts cannot agree whether this slide is good or bad for the economy.
Labour unions, the government and large manufacturers have welcomed the rand’s fall, but industrial economists warn that a country’s competitiveness is far more complicated than simple currency weakness.
Trade and Industry Minister Rob Davies said at the start of a two-day Brics business meeting this week: “The depreciation of the rand, in our estimation, presents a number of opportunities, both for exporters as well as for manufacturers that are competing against a surge of imports.”
However, at least one analyst is not convinced that this will have any impact on the economy.
Adrian Saville, a lecturer at the Gordon Institute of Business Science and founder of Cannon Asset Management, said one of his MBA students had updated an earlier paper he had published on the relationship between rand performance and exports, and what she had found was startling.
“We looked at countries whose currencies have all weakened against the US dollar . . . [and] it is hard to make the argument that currency weakness leads to some sort of manufacturing stimulus,” he said.
Locally, however, manufacturing performance and exports have seen a muted improvement — although it is difficult to say how much of this is owing to the weaker rand.
According to the latest Statistics South Africa data, manufacturing production increased by 0.4% in June 2013 compared with June 2012. Eight of the 10 manufacturing divisions reported positive growth over this period.
Exports, too, seem to be responding positively to the weak rand. Department of Trade and Industry data show that South Africa exported goods worth R632-billion in 2012, lower than the R659-billion exported in 2011 but higher than 2010, when exports amounted to R575-billion.
According to Saville, a weakening currency offers only a shortterm bump in competitiveness, which is ultimately cancelled by imported inflation.
Coenraad Bezuidenhout, executive director of the Manufacturing Circle, disagrees with Saville, saying that sluggish export growth may be caused by the weak economy generally, rather than being a sign that rand weakness has no impact on manufacturing.
Bezuidenhout said that in a depressed economy, rand weakness helped manufacturers to alleviate their margin squeeze.
But Saville said: “If it is that easy, if indeed currency weakness was all that was needed to improve the competitiveness of our manufacturing sector, then what are our policymakers doing in an economy that suffers from 25% unemploy- ment? Why haven’t they weakened the currency? Do they not care about unemployment?”
Christopher Malekane, an associate professor of economics at the University of the Witwatersrand and a former chief economist for trade federation Cosatu, agrees with Bezuidenhout.
“The currency is not a silver bullet to growth, but it can help a lot when combined with other robust state interventions in the economy,” he said. “Very few economists or analysts will argue that you can grow an economy with a strong currency, which leads to persistent trade and current account deficits. The optimal level where the rand should be is where it leads to full employment.”
Malekane added that the state could delink the prices of staple goods and imported components from currency fluctuations. This would help to keep the price of essential items low and keep a lid on pressure for wage hikes while stimulating the productive side of the economy.