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.