With the rand seemingly determined to break through the R7 to the dollar limit, some South Africans may smile at the prospect of overseas travel again becoming affordable.
For others, the stronger rand may mean little as the price of food and other consumer items remains high.
Since the start of the year the rand has strengthened by 19% — this after its 40% rise during 2002 recouped the dramatic losses of the year before.
But the drop in inflation has been slower than expected and the March consumer price index figures were disappointing. The CPIX (inflation excluding mortgage bonds) fell to just 11,2% in March from 11,3% in February, according to Statistics South Africa.
CPIX is a measure used by the Reserve Bank to target inflation, to keep it between 3% and 6%. The Reserve Bank — in charge of setting monetary policy — has decided not to cut interest rates at present.
In January Reserve Bank Governor Tito Mboweni warned inflation should be “moving significantly in the right direction” before there could be speculation on interest rate cuts.
What is the optimal value of the rand?
Dr Iraj Abedian, Standard Bank chief economist (IA): The optimal level of any currency is pretty much dependent on the structure of the economy and what happens with other currencies. For as long as the dollar remains vulnerable then other currencies like the rand and the Australian dollar become stronger without doing anything. It is optimal to have a currency that is relatively stable and does not fluctuate.
Richard Downing, South African Chamber of Business (Sacob) senior economist (RD): It’s very difficult to determine. It depends on the total equilibrium in the economy including issues like unemployment, trade and capital flows. Thirty years ago the optimal value may have been 50c to the dollar.
Ravi Naidoo, director of economic think-tank Naledi (RN): You would have to look into the crystal ball. The rand is still undervalued in relation to other currencies. But what it really needs is to find a good level and stay there.
What is behind the rand’s strength?
IA: South Africa’s economy, for the first time in 40 years, has grown more than any other in global terms: around 3% against a global average of 2,4% or 1,4% among emerging and developing countries only. Our market has normalised with the removal of historical baggage in terms of foreign exchange controls, the blocked rand, etcetera. The government now has a track record and has built up a level of credibility that five to 10 years ago did not exist. Business begins to invest long-term.
RD: South Africa has a very good functioning financial market. It has been credible over years. People may see it as an option. Another factor may be the interest rate differential: for example, you can borrow at 1,5% to 2% in the United States and invest it in South Africa at a higher rate, making profit by simply leaving the money. But it all could turn around with the herd mentality in the markets.
RN: The US economy is not really growing. Even if South Africa’s growth rate is moderate, it is growing. Another important factor is the interest rate differential. However, it is important that South Africa attracts direct foreign investment. We do not want the rand to strengthen on the back of speculation [on the interest rate differential]. That’s an accident waiting to happen.
What changed since 2001/2002?
IA: The global economy is in the throws of turbulent times. Suddenly there is no one safe haven and that’s a new development in 60 years. Instead South Africa has become a little safe haven. People do not send their money out, they keep it here. Overseas institutions bring their money here: investors are buying property in Johannesburg and Cape Town. Zimbabwe has gone as worse as it can. The more absurd things go in Zimbabwe, the rand is increasingly becoming delinked.
RD: There is a high level of risk throughout the world. The dollar lost value. Everything can influence the rand — a political speech; a comment by the Reserve Bank governor. Risk remains a big factor: Zimbabwe … South Africa, as part of Africa, [is] affected by what another country may do and security of property rights.
RN: Then there was a herd that was in full flight to take money out. Now it’s going the other way. The whole mood that the rand is a one-way bet [down] has changed. Zimbabwe may affect perceptions, but has no real impact anymore. The international environment is still very uncertain.
Why, if the rand is strengthening, are prices in shops not dropping?
IA: Some of the prices are not coming down as much as they should. That’s because of business pricing structures: they can’t believe the rand is holding therefore they are not adjusting prices. The onus is on all of us to challenge that.
RD: There is a lagging period between production and consumer prices. On the shelves in the shops is a lot of old stock. Businesses are looking at the value of their stocks — some more expensive and some cheaper — to get a fair return on their capital.
RN: There are certain local concentrated ownership patterns in the supply line. In terms of food, prices are sticking upwards — they are not giving back all the pricing grounds they made. The government will have to look at that.
How does the stronger rand affect ordinary South Africans?
IA: It is a mixed bag, especially for those who put their money in nest eggs abroad. All ordinary South Africans in their capacity as consumers are better off — the petrol price is coming down. Interest rates should be cut, but not to create instability and trigger further fluctuations.
RD: The petrol price is expected to decrease quite meaningfully. This is how the man in the street will be affected. The consumer Bill will take a little longer to get through, but the prices are increasing at a lower rate.
RN: It should help people if we find prices responding, say in terms of food and fuel. Food is the biggest thing to watch. For the middle- and upper-income classes it will be cheaper to buy luxury goods.
How does the rand affect importers?
IA: Importers love it. For every dollar they bring in they are paying less rand.
RD: Importers are smiling because it’s becoming much cheaper. Imported goods are now back at the same level they were last year.
RN: They benefit.
How does the rand affect exporters?
IA: Negatively. Exporters and many of the businesses have done their business on the assumption of a weakening rand. In 2002 they were quietly feasting on the windfall of the attack on the rand.
RD: Exporters are hurting. For example, while the gold price has not moved much, the returns in rands have dropped from R2 669 on March 25 to R2 448 on April 25 2003. The mines are getting less rand, but costs are not getting less.
RN: It is bad for the basic commodity industries, which peg their prices on import parity — no difference in the price of export goods to the same goods sold locally. Exporters will find pressure on wages and labour. That argument will not hold for those exporters who rely heavily on imported components [which are now cheaper].
Which industries does it affect most?
IA: The mining industry because its output is entirely export-driven. [Mining houses] assumed the currency would depreciate by 10% each year.
RD: All industry is affected. The problem is the currency fluctuation. Planning was done at a level of, say, R11 or R14 to the dollar. The whole scenario has now changed and that is a problem. The prospect of job losses is real. People now may not have the money they would like to invest. If it is not available, projects may be stopped. In tourism, one year ago it was much cheaper to visit South Africa.
RN: There is a lot of pressure on the mining industry. This will play out
in the context of wage negotiations where the movement of the currency has an impact, not the company itself.
How do companies plan around currency strength?
IA: What we need to do is to challenge the mindset that a currency in Africa can only go one way — down. The reality is that the global turbulence has rejigged the broader environment. There is no sign that this picture is going to change. Business planning has to be relooked at.
RD: It is very difficult to predict fluctuations. Business is a tricky business. One shouldn’t call for artificial action. But Sacob would like to have seen interest rate cuts, but that is a policy decision.
RN: It is really hard to plan. If you are an exporter and you planned at around R12 to the dollar and now it is just over R7 to the dollar, that is a huge swing. It is a high-risk affair when the international environment is volatile. Planning for the local market is easier: South Africa needs investment in local markets.
How does the rand relate to currencies other than the dollar?
IA: The rand is stronger against all other hard currencies. Our economy is in a better position than others.
RD: The rand has strengthened against all hard currencies.
RN: The rand has done relatively well against all currencies, but especially the dollar.
How does the rand relate to our neighbours’ currencies? Does it matter?
IA: Not really as most of the regional currencies are tracking the rand. Botswana’s pula is slightly stronger because of the country’s stronger foreign currency reserves.
RD: The region is not that significant: those doing business in Zimbabwe are looking for hard currency, and trade with Botswana is very small.
Internationally, the price of gold, diamonds, platinum and oil are fixed in dollars.
RN: The rand is in a different category. There is really no relation.