It would be funny were it not so cruel — the behaviour of the rand, that is. The Springbok is now behaving like a bull in the china shop that is our carefully, sometimes too carefully, managed economy. Except that the delicate ware it is wrecking is economic growth and people’s livelihood.
Michael Power, portfolio manager at Investec Asset Management, uses the words balloon, decimate and collapse to describe what the rand will do to our current account deficit, industry and gross domestic product growth.
This week the rand flirted with dangerous new levels, touching a high of R6,78 to the dollar on Tuesday and falling to R6,87 by Thursday.
At the same time, Statistics South Africa reported that manufacturing output in August fell by a seasonally adjusted 2,6% from the preceding month, and 4,9% for the year. This is especially disheartening, following fleeting signs of recovery in July.
The trouble, as always, was sparked by the rich. Power described the recent decision by G7 to weaken the dollar as ‘watershed” and an ‘epochal event”. ‘Monetary policy with the backdrop of a weak dollar has to be different from a backdrop of a stronger dollar,” he said.
Power believes our monetary authorities should pay attention to real interest rates policy, which, he says, ‘has been too strong, for too long”. He puts the spot real interest rate at 7%. He also notes that, provided the rand does not strengthen further, there is less scope for volatility. This is because there will be no more primary offshore listings, most institutions are near their 15% offshore limit and the net open forward position is closed.
He suggests that the Reserve Bank should at least double the current level of $6,5-billion in foreign reserves and look at ‘specific but limited aspects of foreign exchange controls” to release pressure through an outflow.
Most importantly, Power notes that investors now look to companies that do not derive artificial profits from a weakening rand, but have sound fundamentals.
Their biggest challenge is China, the next economic superpower. Now there’s a shop to rampage in!