While the South African stock market comes under pressure and exporters bleat about the dire consequences of the rand’s strength, there is a flip side to the rand coin and many of the benefits of a robust rand are going unheeded, commentators say.
On Friday afternoon, the rand sustained a break below the psychological R6 per dollar level for the first time since October 1999 and on Monday afternoon it touched R5,88 per dollar — its best level since January 1999.
This is a far cry from December 2000, when the rand touched a worst-ever R13,86 per dollar. While local equities reached record highs, few were celebrating because people realised the negative effects the rand’s weakness would have on inflation and the economy.
Martin Jankelowitz, head of market and economic research at Investment Solutions, says people are tending to only see the negatives emanating from the rand’s current strength, when a lot of positives could also emanate.
He says that while rand strength could place certain sectors under pressure, it also brings opportunities for the South African Reserve Bank and the Finance Ministry to make bold decisions.
“We need to focus on what this mean for fundamentals … It is an opportune time for the authorities to either beef up reserves or relax exchange controls,” he asserts. “Everyone is just focusing on the negatives, we need to extract the full benefit of the positives.”
Absa treasury economist Chris Hart says there is a need to look at what is driving the rand. While there are external drivers such as a weak dollar and higher commodity prices, there are also other factors, such as interest rates.
While there has been a broad consensus that there is a need for rate hikes, these may not be necessary with the rand at current levels.
“If [interest-rate levels] are creating distortions, then rate cuts should be considered,” he says.
Hart agrees that people are being too negative when it comes to the rand’s strength, but adds that if the rand firms too quickly, it will have a suck-down effect on business rather than an adjustment.
“A strengthening currency is far better than a weakening one. I regard the currency as a store of wealth and to depend on a weakening currency to get growth going is like saying let’s destroy wealth in order to generate income — it is just self-defeating.”
He adds, however, that the currency needs to strengthen at a rate where companies can adjust by improving productivity.
If the currency is roaring ahead unbridled, in a way that makes it difficult for companies to remain competitive, there is a need to relieve some of the pressure placed on business.
Dawie Roodt, chief economist at the Efficient Group, notes that while certain sectors suffer, others do really well, which prevents the economy from collapsing.
“We are very sensitive to the rand because we are primarily still a commodity-exporting country. A large part of the economy is in exports, so the rand has a huge effect, but we have a large domestic economy as well,” he says.
He adds that his previous view of a 50 basis-points increase in rates later this year will have to be revised and the next move, if anything, could be down, although this would probably only happen this year if the rand remains where it is. This depends on inflation numbers.
“The rand will stabilise somewhere probably at a fairly strong level. But it will lead to a larger current-account deficit, which over the longer term will lead to a weakening currency. I’m sure this will happen, but I don’t know when.”
While in purchasing power parity terms the rand should be at about R5 per dollar, Roodt doesn’t think this will happen. However, a rand at about R7,50 to R8,50 per dollar is more in line with balance of payment constraints.
“Exporters are taking a knock, but we are not closing down our export sector — they are still making money. Some guys are having a difficult time, but they had it very nicely a couple of years ago and they are just longing for the good old days.” — I-Net Bridge