The rand’s recent recovery is not just a cause for optimism, but also a window of opportunity to be exploited in order to realise job-creating growth and a trigger for stabilising key indicators, says Iraj Abedian, group economist of Standard Bank.
The thrust should start with interest rates, the peg around which all else revolves, says Abedian.
This week the currency continued its impressive recovery, reaching R9,64 to the dollar on Wednesday, in the process appreciating more than 20% for the year, making it the year’s best-performing currency.
Abedian and other economic commentators expect the rand to touch R9,50 and hover at around this mark for the year, provided no major unexpected shock occurs. Abedian emphasises that the level of the currency is less important than the range within which it flutuates.
At the same time, gold reached $331 an ounce, its highest level in two and a half years. “Because our economic growth rate is higher than the global average, that makes our shares more attractive relative to other markets,” says Abedian, noting investors’ enthusiasm about relatively high and positive rates of return.
The economy’s average growth rate is 2,2%. The average rate for developing countries is less than 1% and for emerging markets below 2%.
Anticipating this recovery, Abedian recently called for a sober perspective. In a study of five major currency crises around the world in the past decade and their effects on interest rates, inflation, the stock market, industrial output and foreign trade, he concluded that “the [recent] ‘doom and gloom’ perception was disproportional and out of context”. The most important reaction is that of two phenomena most closely linked to the currency: interest rates and inflation.
Next week the Reserve Bank is expected to announce a one percentage point interest rate hike — a move with which Abedian disagrees — in a bid to curb inflation. “Even if they do nothing”, he says “inflation will still peak at 9,7% around August or September. The economy will continue on the growth path. Now if they raise the rate, that will undermine growth prospects by dampening demand.” Abedian expects interest rates to start falling during the first quarter of next year.
Releasing its monthly Business Confidence Index, the South African Chamber of Business (Sacob) also voiced misgivings about raising interest rates. The index shot up from 101,3 to 107, buoyed by the recent wave of good news.
The rand’s recovery is also good news for industrial output. Abedian reckons exporters, who always have a party when the rand depreciates, will continue to enjoy themselves as long as the exchange rate stays around R9,50.
The current levels make imports cheaper — key for the import-dependent tertiary sector, which accounts for 68% of the economy and comprises sectors such as the telecommunications, information technology and financial services.
“We have to strike a balance,” says Abedian, “and remember that depreciation [adversely] affects our tertiary sector while it benefits sectors like mining and agriculture.” Minerals accounts for between 10% and 12% of the economy.
This week the Investec Purchasing Managers’ Index, which monitors manufacturing activity, decreased from 59,3 in April to 57,0 in May, pointing to an expansion at a lower rate. At the same time, new-vehicle sales figures for May showed an increase of 2,1% on May last year, and 10,8% from April.
But Abedian notes, “We must be careful not to lump success stories with failures.” Whereas industries like the automobile and components manufacture continue to do well, there are problematic areas.
One is the textiles industry, which, Abedian says, “is not geared to take advantage of opportunities in North America”. Industries of this kind need to increase their scale of operation to take advantage of competitive export prices. “The window of opportunity where sentiment is positive must be used to elevate negotiations between business and labour to a level of sophistication that is demanded by a competitive global economy.”
Another area that the recovery will benefit is the trade account. The balance of payments is currently running at a surplus of R3,5-billion, most of it created by increased export revenue from the weaker rand.
Abedian expects that trend will persist and foresees no balance of payment problems “for at least the next year and a half”.