Finance Minister Pravin Gordhan met this morning (6 January 2012) with International Monetary Fund chief director Christine Lagarde. The volatility of the rand and its exposure to the Euro were on the agenda.
The rand has weakened significantly of late (20% in the past year) just as demand from a beleaguered European Union, our number one trading partner, is predicted to fall. Will a falling rand prop up demand? It seems doubtful; the nature of South Africa's trade with Europe, and the country's manufacturing statistics suggest otherwise. Do we see a sudden rush to invest in South African industry? Is there a surge in exports and manufacturing? Is unemployment falling? The answer is an emphatic no.
While many feel the Rand was overvalued, it is arguable that it is undervalued, and that a range between R5 and R6 to the dollar is about right. The new beefed up Big Mac index of The Economist which measures Purchasing Power Parity has the rand at around 29% undervalued against the dollar (or -24% when adjusted for GDP per capita; and that was in July when the rand was considerably stronger).
Even when the rand hit all-time lows (in the late 1990s), we saw but a modest increase in exports. Nor have we seen much benefit on the previous occasions it fell: R10.50 (March 2009), R11.20 (October 2008), R11.68 (January 2002), R13.84 (December 2001). You can't kick-start an industry just with a weak currency. It requires investment, labour, infrastructure, confidence in the country and its leadership. Consequently, the rand lurches dramatically within any given year. From the perspective of business, volatility is a far bigger problem than the rate.
Certain sectors lobby for a weak rand, because it acts as a beneath the radar trade tariff barrier to protect local manufacture from cheaper imports. COSATU's call last year for government to intervene directly and weaken the rand (supported by the PG Group, Sasol, Amka Products, Consol Glass, ArcelorMittal, Altron and the National Association of Automotive Component and Allied Manufacturers) is in some ways bizarre. Devaluing currencies used to be a favourite spoon of bitter medicine administered by the old IMF, and was usually strongly resisted by left-leaning economists.
Doesn't COATU's economic team know that few things could make the ‘greedy, white, imperialist, global capitalists' happier than a weak rand? Our minerals (a finite resource) become "cheaper", something one would think that what passes for the Left in this country would be unhappy about. A weaker rand also makes the country more vulnerable to currency speculators.
Our trade unions (and the IFP) think a weak rand is a neat idea; it makes labour cheaper on the global market without having to improve productivity. COSATU even quotes China as their model.
However, this is of course short-sighted. In South Africa, a weaker currency quickly leads to inflation that erodes those wages faster than the wages can increase. Besides, we have such a huge pool of unemployed that even in the best case scenario more demand will not lead to much wage competition.
One should also note with some grim humour, that when the rand was low, the mining industry claimed it couldn't afford the higher costs of imported inputs such as machinery, and therefore it needed to lay off workers. When the rand is high, the same industry cites the falling precious metal prices (quoted in dollars) to justify job cuts.
The South African rand is the continent's only ‘hard' currency. It is used in Zimbabwe, Namibia, Lesotho, and Swaziland. It is exchangeable at Forex trading booths all over the world; try changing loti or lilangeni at Heathrow.
The strength of a currency within its borders is at least if not more important than its exchange rate. One rand still buys something inside South Africa; one Zim dollar does not buy anything in Zimbabwe.
Traveling around Africa, you find many countries operate with a dual economy - a dollar economy and a local ‘funny money' economy, because even within their borders their currency is almost worthless.
To the chagrin of some political voices, there is unfortunately much more to a strong rand than making overseas holidays cheaper for rich South Africans. A seriously devalued rand will immediately cause a brain drain of skilled workers to countries with harder currencies. If it persists at low levels, the elite and skilled will soon demand to be paid in dollars or pounds (years ago, when the rand seriously tumbled, some five-star hotels in Cape Town started charging for rooms in dollars).
The elite will carry on the same as always. But meanwhile the poor will get poorer as they slip into the peso economy, as has happened all over the developing world. Once that happens, their prospects of lifting themselves out of poverty are ever more remote.
As the rand weakens, interest rates rise, making life hard for small businesses and our high-debt carrying citizenry. A weak rand impacts negatively on an already very low domestic savings rate. The price of oil, and therefore petrol at the pump, rockets and has a knock-on inflationary effect. Local companies and agricultural holdings not to mention residential rme property all become vulnerable to foreign ownership.
The price of food goes ever higher, due not only to imports but the higher value of exports. Local consumers have to compete with rich European consumers; the best local produce is sold for lucrative foreign exchange and the locals get the reject fresh produce at inflated prices.
Besides, deliberate devaluation is very expensive and often ineffectual. The South African Reserve Bank under political pressure has already done some squandering in this regard. Nor can South Africa afford to start a currency war. Ethiopia has in the last few years devalued its currency numerous times, once by 17% in one day. It has not translated into much for its citizens, merely helped manufacture some pleasing macro-economic statistics. And once devalued, many other policy options disappear. Essentially, one has shot one's bolt.
Of course, the easiest and quickest way for the government to devalue the rand is to continue muddling along, pulling in contradictory ideological directions, and indulging the populist rhetoric of the ANC Youth League and the Provincial Executive of Limpopo.
The crisis in the Euro has meant that the currency markets are unprecedentedly treacherous. A weaker rand will only make our negative trade balance (currently standing at over R45 billion) with continental Europe worse. A strong rand will be needed for the stormy times ahead.
This is why we need to worry about a weakening currency.
Brent Meersman is the author of Reports Before Daybreak and Primary Coloured. Follow him on Twitter.
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