Stand by for an exchange rate of R5,50 to the dollar, buy South African shares, and keep away from mining stocks.
Such was the advice of economists this week, who continued to grapple with the strengthening of the rand, unsure of what is causing it or how long the bull run may last. Last Friday the rand broke through the R6-to-the-dollar level and spent the first half of this week there. This is the currency’s best level in more than five years and a far cry from the mid-December 2001 low of R13,82 to the dollar.
Now, as then, no one is certain about what drives the movement or how long it may persist.
Gregor Krall, technical analyst at BoE Private Clients, called the dollar at R5,50 when it was trading at R6,50. Now he expects the currency to break the R5,75 level. “The only time I’ll be concerned about the [R5,50] target is if it breaks through R6,40,” Krall says.
Dawie Roodt, chief economist at the Efficient Group, is disarmingly honest: “I don’t know what to say any more.” He attributes the rand’s strength to strong positive sentiment, the weak dollar and relatively high interest rates.
Roodt warns that none of the policy options are guaranteed to weaken the rand. An interest rate cut will lower the real interest differential globally; making South Africa less attractive, but it could also stimulate local demand, further strengthening consumer spending and import demand.
Roodt says the limitation with South African monetary policy is that it focuses on inflation, not the currency.
Another suggested option is to ease or phase out exchange controls. “But that might lead foreigners to think we know something they don’t and invest in the country,” says Roodt.
In marked contrast with woe-filled trade unionists, Rejane Woodroffe of Metropolitan Asset Managers plans to tell a breakfast audience on Friday that the rand’s strength gives reason to celebrate South Africa’s prudent economic management.
Woodroffe argues that a strong rand encourages more efficient companies and protects the economy from rising food and oil prices, both of which affect the poor. “I am not saying there is no pain. But there would be more pain if we hadn’t made the macroeconomic reforms of the past 10 years.”
Woodroffe considers any state intervention to correct the currency “myopic”. “It will cause inflation, an unstable currency and a boom-and-bust type of economic growth.”
She reckons the rand’s fair value is R5,50 to the dollar, but expects an interest rate hike by the end of the year, which will ease the rand to R6,20.
Woodroffe cites the news service Bloomberg’s Baltic Freight Index, which shows the prices charged by ship owners for exports already purchased on board their vessels. It is considered a leading demand indicator because it does not reflect speculative influences and is heavily coloured by commodity prices.
Between the middle of last year and beginning of this year when commodity prices were rising, the index rose 63%. Between January and June, when prices were coming down and the rand should have weakened, the index halved and the rand continued to grow in strength. Now the index is rising, ascending 40% over the past month and lending added support to the currency’s stratospheric performance.
Brian Kantor of Investec Securities supports Woodroffe’s view, arguing that complaints about rand strength “miss the bigger picture”. In a quarterly review of investment strategy, Kantor calls for South African markets to rid themselves of inherent expectations of a weaker rand.
He notes that while the currency has hammered export- and import-competing industries, it has boosted consumer spending and service industries. He adds that the tertiary sector — largely services — now accounts for 65% of the economy’s Gross Value Added and has grown by 1,5% since 2000 at the expense of mining and agriculture.
Kantor points out that the stock exchange does not reflect the broader economy, as the latter is dominated by consumer-dependent firms, while the bourse is dominated by rand- sensitive stocks, such as resources.
All share index earnings have grown by 61% since January 2000. Retail earnings have grown by 89%, while banks have earned 70% more over the period.
Kantor argues that while resources have suffered, they are still in a better shape than in January 2000.
For Roodt investment in shares — but not resources stocks — is currently the wisest course.
Workers are not ‘factors of production’
Any debate on the strong rand that focuses solely on the mining industry misconstrues the real situation in South Africa, writes Gwede Mantashe. The strengthening of the currency affects the entire export sector.
Organised labour’s biggest fear is that the mining companies will resort to subtle divestment using sophisticated strategies. They will focus on high-grade mining and withdraw from marginal sections, shortening the life of individual ore bodies. Ultimately these shafts will be handed to black economic empowerment companies desperate to survive by mining marginal shafts with low grades.
Compounding the situation will be economic diversification in our region that could potentially reduce dependency on South Africa’s mines. Confirmation of this can be seen in the numerous greenfield projects in the platinum and diamond sectors.
Although the state can do very little about what is happening, institutions such as the Reserve Bank should avoid arrogant intervention in the debate. It is workers who are suffering, not the bosses, and it is workers’ votes that return the African National Congress to power every five years. Their jobs are being exchanged for a creditworthy country. Where the government’s policy is to limit borrowing, their votes are devalued.
This situation is just as desperate in the clothing and textile sectors. Similarly, workers in privatised Telkom have become mere statistics. A decision to reduce the workforce by 10% annually is implemented without regard to the ANC’s call for a people’s contract to create jobs and fight poverty.
The question of the strong rand should not be viewed as separate from this election commitment. The temptation in the current situation may be to create inferior jobs so that the statistics look good. But if workers’ total earnings continue to decline, levels of poverty will not be reduced. The retail sector, currently booming, will also ultimately feel the pinch.
Our search for answers should be premised on the people; we must relate the debate to our people’s real-life situation. Analysts often seek to test ideological thinking. Their debate is blind to the interests of workers, who are viewed as cost items or factors of production.
In a scenario like this, workers can only make their voices heard in the streets and at the gates of the Reserve Bank.
Gwede Mantashe is general secretary of the National Union of Mineworkers