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Madeleine Wackernagel Taking Stock
Barely an eyebrow was raised as the rand tumbled to new lows against sterling this week. Higher interest rates in Britain are to blame, they say, so the blip is a temporary one. I don’t think so.
With the United States also considering higher interest rates in response to inflationary pressures, the rand is due for a further battering. As long as the depreciation is a gentle one, rather than a replay of last year’s crash, the effects should not be too dramatic. We have had plenty of time to become accustomed to a weaker currency.
All of which is good news for exporters. Well, yes and no. As the fallout from the Asian currency crisis continues to reverberate around the world – the Latin American currencies are already under fire, as are many African – our competitors become increasingly cheap.
According to the Economist magazine’s Big Mac index, a measure of currency values based on the theory of purchasing power parity (the same products and services should cost the same everywhere), the East Asian currencies are seriously undervalued – as is the rand. A Big Mac costs R7,80 in Johannesburg; $2,53 in the United States. So dividing one by the other would give a rand-dollar value of R3,08 – a far cry from the prevailing R4,82 rate.
By the same measure, the Chinese yuan is 54% undervalued; the Malaysian ringgit 55% and the Thai baht 49%. Imports will shrink as a result.
The South-East Asian countries take only 11% of our exports, so the effect of a drop in their buying power will be minimal, but they are our biggest competitors in the commodities and manufacturing markets.
Not being strong on manufacturing – we don’t compete with the Toyotas and Microsofts of the world – it isn’t the European, American or Japanese exports we’re up against, but the softer prices of our weak-currency competition as producers scramble to maintain their market share. Commodity prices are already falling in anticipation – most base metals, and gold in particular, are sliding.
One other big effect of the currency crisis is a potential slow-down in world growth, as Asian countries tighten their belts and trim their current account deficits by cutting down on imports. This will have a knock-on effect on their main suppliers. The most pessimistic estimates reckon America’s growth could be 0,4% lower, Europe’s 0,3% and Japan’s as much as 1% next year, in turn dampening their demand for goods.
The result then is fewer and cheaper exports over the next 18 months, which bodes badly for our current account. Even more worrying is the prospect of cheaper imports flooding the local market and knocking the domestic competition. After the devaluations, a Hyundai or Daewoo will invariably be a more attractive prospect, in terms of value for money, than the locally made equivalent.
South-East Asian countries paid a high price for letting their current accounts get out of control. And not that long ago, we were suffering the same fate. So far, South Africa has been priding itself on the fact that with a deficit of “only” 1% of gross domestic product, rather than the 8% seen in Thailand, for example, we were immune from similar punishment.
The next 18 months could see that change as the competition hots up among the developing country exporters. Unless kept in check, a widening deficit could see the rand going the same way as the baht. Not a welcome thought.
Further depreciation is inevitable, even with the counter-force of capital inflows returning to soften the blow. Raising interest rates to shore up the rand is not an option; neither, alas, is dropping them – at least for the foreseeable future. Such action would only precipitate a crash in the current nervous market climate. More likely – and preferable – is a slow, even decline of between 10% and 15% over the next year on a trade-weighted basis.