The effects of political change have not yet filtered through to the exchange rate, writes Simon Segal
DESPITE its recent recovery, the persistent erosion of the value of the rand is a worrying testimonial to the new government. After all, many predicted, once South Africa’s first non-racial election was over the pressure on our currency would ease as violence abated and a legitimate government of national unity restored investor confidence.
Now, since Nelson Mandela was inaugurated as President on May 10, the rand has tumbled by one percent against the US dollar (to R3,61), 4,1 percent against the British pound (R5,56), 1,9 percent against the Japanese yen (one rand is Y28,05) and 4,3 percent against the German mark (one rand is DM0,44).
This brings the rand’s total fall this year to 6,2 percent against the dollar, 10,5 percent against the pound, 14,7 percent against the yen and 13,7 percent against the mark.
Calculating the nominal effective exchange rate of the rand — that is, measuring the rand against a weighted basket of the main currencies with which South Africa transacts — Standard Bank estimates the rand’s decline since the election as 2,6 percent and 9,7 percent since the beginning of the year. Its index, based on 100 in 1990, is now at 71,12.
The encouraging aspect is that this is well off the rand’s weakest level ever at the end of July — 69,36 on Standard Bank’s weighted basket. The local currency was then at R3,69 to the dollar, R5,62 to the pound, Y26,5 and DM0,43.
For its part the Reserve Bank calculates that the nominal effective exchange rate of the rand, also using an index with a base of 100 in 1990, was 79,5 at end-December and is now around 72, a decline of 9,4 percent. This is some 26 percent down from its high of 97,2 in February 1991.
Calculating the real effective exchange rate of the rand — using a weighted basket of currencies but taking into account inflation differentials between South Africa and its main trading partners — the Bank shows that the rand has dropped from 99,5 at the end of 1993 to 94,25 at end-May (again the index base is 100 in 1990). It is probably around 93 now.
Since the unbanning of political organisations and individuals in 1990 the rand’s real effective exchange rate peaked at 105,2 in July.
So what is going on? One economist says “the bottom line is simple — there is no faith in the currency because of a lack of faith in the economy”. This is curious when the economy is showing its best growth since the 1970s (which is widely expected to continue into 1996) and the inflation rate is in single digit figures for the first time since the 1970s.
The market and investors, however, are not convinced about economic potential. They focus on a scenario of unemployment, poverty, strikes and fiscal demands for social upliftment.
This is the same reason behind South Africa’s weak balance of payments position. At R7,6-billion, gross reserves cover 1,2 months worth of imports. This is down from 1,6 months at the beginning of the year. But, the R484-million rise in the Bank’s reserves in July is the first rise since January, when reserves were at R9,1-billion.
To achieve a higher growth rate of, say, five percent, requires a net capital inflow of around R1-billion. This will only happen when government’s policies are accepted as credible and responsible.
The net capital outflow over the past 15 months has been US$6-billion of which US$1-billion was in the first four months of this year. But officials have been saying that since the election in May outflows are matching inflows as trade credit returns to South Africa.
Long-term funds will flow into the country once an international credit rating has been obtained for South Africa, probably in September.
Portfolio investment in South African equities and bonds is still volatile, unpredictable and vulnerable to political developments.
The market is also reacting to the perpetual speculation around the abolition of the financial rand (finrand). Its all-time low just before the elections was R5,71 against the US dollar. It is now around R4,58.