Fragile rand remains a concern as Reserve Bank's MPC meets
Concerns of a weak currency has weighed on the country's growth prospects. The rand slid to R9.1909 to the dollar at the close of the JSE on Friday, down from R9.12 the previous week.
The level marked a four-year low to the greenback and was attributed most to continuing unrest in the mining sector and a soaring trade deficit that kept investors weary.
The rand’s current weakness was not only a concern for short term capital inflows and outflows for the country, but also long term problems linked to inflation and, ultimately, economic growth.
Finance Minister Pravin Gordhan said as much at the annual Bank of America Merrill Lynch investment conference last week.
"On the currency, generally whoever we talk to doesn’t want to see the kind of volatility we see at the moment," he said.
“In our case, we want to see more stability in our environment and less fluctuations so that we can see economic certainty for our businesses."
But if the rand’s current trajectory were to be followed, fluctuations in the economy could be the order of the day for some time.
With no sign of positive economic news on the horizon, the willingness to sell the currency became entrenched among traders.
While a weaker rand could yield some positives, with manufacturers possibly boosted by exports becoming more enticing to the global market, a frail local currency means trouble.
“A weak rand is never a good thing,” said Chris Hart, chief economist at Investment Solutions.
“It’s never boosted our exports to the level that the negatives [from a weak currency] are overshadowed. We should be worried as it’s not a good sign of where things stand at the moment.”
With this in mind, all eyes will be on Reserve Bank governor Gill Marcus and her monetary policy committee when they meet from Monday to discuss the possibility of changing interest rates.
The bank kept its benchmark prime interest rate unchanged at 5% since dropping it by half a percentage point in July last year and a weak rand will provide the opportunity to possibly move the rate higher.
If the prime interest rate was increased, it could lead to a strengthened local currency once investors bought the rand to take advantage of the higher interest rate.
But after Marcus described the recent fall in the rand as “overdone”, this could be unlikely.
“There is not much that can be done about a weak rand unless the environment within which the economy operates improves,” said Neren Rau, chief executive of the South African Chamber of Commerce and Industry.
“Business should rather worry about keeping internal cost pressures in check than concern themselves with measures beyond their control.”
Hart said economic growth in the country was stunted because the causes behind the rand's fragility were not dealt with.
“South Africa finds itself in a position where our weak currency is just a symptom of underlying economic problems,” he said.
“This may lead to the Reserve Bank trying to fix it in the short term but it won’t help us in the long run. We need to grow our economy at a faster rate.”