The current strength of the South African rand is unsustainable, according to private wealth management company Citadel’s chief investment officer, Dave Mohr.
“The four factors that have resulted in a more than 50% appreciation in the rand over the past two-and-a-half years have all reversed over the past three months, so the current strength in the rand is unsustainable,” Mohr told a media briefing on Wednesday.
On December 20 2001, the rand reached a record worst level of R13,86 per dollar, R20,0866 per pound sterling and R12,4790 per euro. The trade-weighted rand was R36,09.
On July 19 2004, the rand touched a best level of R5,88 per dollar, R10,99 per pound sterling and R7,3089 per euro, with the trade-weighted rand at R63,50.
“The most important factor is dollar commodity prices and those peaked in April. The other three factors, namely the OECD leading indicator, interest-rate differentials and inflation differentials, have all turned since the United States increased interest rates at the end of June,” Mohr noted.
Over the past year there has been a 40% rise in dollar commodity prices, but a surplus of 0,6% of gross domestic product (GDP) on the current account of the balance of payments in 2002, plunged to a deficit of almost 2% of GDP in the fourth quarter of 2003.
Mohr expects the current account deficit to widen to R30-billion on a seasonally adjusted annualised basis in the second quarter from the R20-billion level in the first quarter, as the strong rand encourages imports while slowing export growth.
South Africa’s imports from its non-Southern African Customs Union trading partners soared by 68,5% year-on-year (y/y) in June to a record $4,383-billion, according to the latest Customs & Excise figures released on Friday.
This compared with a 41,4% y/y rise in May to $3,643-billion, using a monthly average exchange rate to convert from the rand amount to dollars.
The June import bill was the first time South Africa’s imports have exceeded $4-billion.
Monthly imports have only exceeded $3-billion seven times so far and were below $3-billion in February 2004 and were only a tiny $1,4-billion in December 2001 when the rand was at its worst level against the dollar.
Monthly imports topped $3-billion for the first time in September 2003 after they rose by 40,2% y/y to $3,087-billion. The cumulative increase in the first half of 2004 was 35,7% y/y to $21,254-billion.
“The surge in imports has meant that our foreign reserves coverage of imports has dropped to less than three months. I believe our import coverage should be at least five months and the Reserve Bank missed a golden opportunity in the first half of this year to add to our reserves,” Mohr said.
The South African Reserve Bank’s gross foreign reserves have increased from $8,185-billion at the end of February to $11,21-billion at the end of June. The July reserves data will be released on Friday. To have a five-month import coverage, the reserves would have to be close to $22-billion. — I-Net Bridge