Our economic sages have long hoped that the rand would depreciate. So why aren’t they celebrating now that it’s in freefall? By GREG NICOLSON.
You can’t please economists. In July when the rand was trading at 6.70 to the dollar, they were reading the last rites to South Africa’s manufacturing sector. Our overvalued currency was crippling the country’s global competitiveness. Exports were struggling. The uncompetitive rand would sacrifice any chance the government had of creating five million jobs by 2020, they said. So in the last three months, as the rand depreciated 16% against the dollar and 11% against the euro, they’d be cheering, right?
Wrong. Manufacturers are celebrating their instant increase in competitiveness (without having to search and slash their way to increases in productivity), but analysts remain cautious. The rand fell because foreign investors fear that Europe is lost in its quagmire of debt and the United States won’t be able to escape its economic malaise. In case there’s another global recession, they have ditched risky assets from developing countries, selling R4.6 billion in South African bonds and R7.6 billion in South African equities. It has allowed the rand to fall into competitiveness, but raises concerns over growth.
For the Africanists among us, it might be nice to see our leaders offering advice and support to the West, but contagion is the sad reality of financial crises and South Africa is already feeling the symptoms. The benefits of a more competitive rand have been reduced by plummeting mineral prices and the flight of foreign investors has raised local bond yields, meaning the government has to pay more to borrow money, leaving less in the kitty for health, education and infrastructure. “It is now widely recognised that the world is in a danger zone from which it is going to be difficult to escape,” wrote Reserve Bank governor Gill Marcus in the Financial Mail this week. “[T]here needs to be the recognition that we are living through difficult times and unchartered territory.”
The rand, it seems, is adding to these difficulties. The Reserve Bank has lowered its 2011 growth forecast from 3.7% to 3.2%, which might normally prompt Marcus to drop the interest rate so that those of you who are considering borrowing will go ahead. But when the rand falls, we pay more for imports such as oil and food, causing prices to rise. And as the Reserve Bank is committed to its target inflation rate like Frodo was committed to his ring, Marcus will resist lowering interest rates when inflation may rise.
So while we watch the slow decline of the global economy, as though watching the sad demise of Amy Winehouse without the ability to prevent the calamity, it seems that a lower rand isn’t that much help. Some analysts have called for the Reserve Bank to follow the Swiss and set a target range for the currency that will reduce volatility. Marcus isn’t convinced, but she’s surprisingly optimistic for an economist: “We should be looking for positive opportunities arising from these events, with both external and internal dimensions. With growth in the US and Europe likely to remain anaemic for some time, South Africa would do well to diversify its trade ties, particularly in Africa, Asia and the BRIC countries, and reduce its dependencies on European export markets.” She will surely welcome the recent announcement that China will invest an extra R2.5 billion in South Africa. DM
"I know of a cure for everything: salt water...in one way or the other. Sweat or tears or the salt sea." ~ Karen Blixen