/ 4 August 2004

Rand strength is ‘unsustainable’

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