Rand on the run

David Bullard says the value of the currency can be thought of as the share price of the country

The last time the rand tanked, as it did last week, I rushed off to my nearest liquor store with a work colleague and bought up several cases of whisky as a rand hedge. If memory serves, when we left the office the rand was trading at around R17.75 to the £ and by the time we returned it was around R20 to the £. Even when the rand settled into less volatile trading territory it proved to be a good strategy and meant that I didn't have to buy whisky for several years.

This time round I wasn't quite so fortunate because I was sitting in London watching the rand's slide with a mixture of horror and mild amusement. When I flew out of SA you needed R14.30 to buy a £ but just over a week later you needed R15.30. That meant that a bottle of Kevin Arnold's excellent Waterford sauvignon blanc set me back around R580 when I ordered it at lunch last week. Worth every penny though.

I mentioned that I met the news of the rand's slide with a mixture of horror and relief. Horror because it was a timely reminder (as if I needed one) that we are a minnow in the global economy and not even our membership of BRICS can protect us from currency volatility. Mild amusement because I suggested in a column I wrote on 31st October 2010 that it might be a good idea to move some rands into an offshore account. Here are the exact words:

The rand is surprisingly strong against the world's major trading currencies at the moment. The minister of finance seems rather keen for us to export our money and has eased exchange controls to such an extent that, for most people, they don't exist. If you felt like shipping a spare R5 mln offshore, now might be a good time to do it. You would almost certainly be able to bring it back to SA in a few years at a very attractive exchange rate. But should things start looking as dicey as I think they will you would probably wisely decide to keep it offshore.

Unfortunately I failed to follow my own advice but if you had done so you would be around 40% better off in rand terms now and easily able to afford a second bottle of that Waterford sauvignon blanc.

As the rand was heading for oblivion last week the press and social media attempted to give reasons for the slide. The PC version was that it was dollar strength rather than rand weakness that was to blame. Heaven forfend that we should dare to suggest that an incompetent government might be to blame. Other reasons were put forward but the simple and concise explanation for rand weakness is more sellers than buyers. Once you've grasped that simple concept then you are free to invent or imagine all sorts of reasons why this should be so.

Think of the value of the rand as the share price of the country and you can begin to understand why it has performed so poorly this year. Firstly we have a government that is hostile to business and regards free enterprise as an anti social activity. If someone is making money in business then they are either a) exploiting their workers b) ripping off their customers or c) dodging taxes. With that sort of mind-set is it any wonder that South Africa is a relatively unattractive proposition for new business ventures? Unless, of course, you have a "special" relationship with the ruling party and are prepared to cut them in on the deal.

Secondly, we have a very militant unionised workforce strangely similar to the pre Thatcher years in the UK. It's also a largely unskilled and uneducated workforce which is why it is easily manipulated for political ends by wily union leaders. As a key partner of the ruling alliance it's essential to keep the unions happy which is why they are free to sabotage the economy. Not a great reason for a strong rand I think you will agree.

Thirdly, our basic services have all but collapsed in this country which suggests that the government is on a disastrous course. Our school children rank second thickest in the world in maths and science subjects which means we simply aren't producing enough engineers and doctors for the future. If we want them we'll have to import them at a cost and while we do that the numbers of the unemployed will continue to grow. Would you buy shares in a company with no growth plan?

Fourthly, the number of South Africans paying tax relative to the number of South Africans sitting around doing nothing and waiting for the ANC to deliver is not sustainable; particularly as the number of dependants versus economically active citizens is likely to rise. Once the "privileged" have been taxed into oblivion the country will need to borrow heavily and expensively. That's not a recipe for rand strength.

Finally, we now have an unenviable international reputation for corrupt practices. We are, quite simply, not very nice people to do business with. Even as the rand collapsed our President was talking about buying a new jet for himself. We are beginning to resemble that basket case to the north of us. Mad Bob is clearly a hero to many ANC supporters who agree with his views that Nelson Mandela was too soft on whites. The good news is that it may not be too late to short the rand and get some cash offshore.


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