The events of the past month serve to remind us that the path to economic prosperity is a precarious one, filled with all manner of shocks and disruptions. The events also show, according to Merrill Lynch economist Nazmeera Moolla, how a strong rand contributes to unbalanced growth.
A month ago this week, Minister of Finance Trevor Manuel unveiled his 10th national Budget, triumphantly announcing that when economic growth figures were released they would show that the economy had grown by 5% in 2005, and when revised later in the year, growth would be at around 5,5%, suggesting that the now in vogue figure of 6% economic growth is closer than many of us realise.
The gross domestic product (GDP) figures released in the days after the budget told a slightly different story.
GDP was found to have grown by 4,9% in 2005, just up from 4,5% the year before. More telling was the finding that GDP for the fourth quarter grew by a disappointing 3,3%, compared to 4,2% in the third quarter.
The limp performance was attributed to the shrinking of the manufacturing and mining sectors, as well as brisk but relatively muted growth in sectors such as finance and real estate.
Manufacturing was further brought into the spotlight by news that the Investec/Bureau Purchasing Manufacturing Index for February rose from 48,1 to 49 points, but remained below the key technical level of 50. Moolla reads this development as “worrying”.
The unbalanced growth that Moolla refers to comes about as a result of domestically focused sectors benefiting from the strong rand, while externally focused sectors are hammered by cheaper imports or uncompetitive exports.
Moolla says the rand alone cannot explain the imbalance as it was at similar levels between the third and fourth quarters.
Unlike in previous instances, though, when we pined for a rate cut each time an exporting sector suffered from a strong rand, it might not even help this time.
And, as previous once-off rate cuts have not had the desired effect on the rand, it is unlikely the Reserve Bank would heed a call to ease interest rates.
Moolla believes the Reserve Bank will instead use the strong rand to accumulate foreign-exchange reserves. This is mainly because the government’s infrastructure programme will require between R15-billion and R20-billion of capital imports over the next five years and reserves will provide a war chest to finance these.
I believe a rate cut, with threats of further cuts if required, would weaken the currency. This is because a cut will reduce the international interest rate differential and hopefully ease foreign fund inflows.
The strong rand also rears its head in the form of a negative trade balance.
The trade deficit for January stood at R3,4-billion, against an expected R1,5-billion. Exports fell 29% in December, owing to the strong rand and a correction of overstated figures. A widening deficit, if not financed by foreign inflows, tends to lead to a weakening of the currency.
Finally, Moolla notes that, in recent years, the rand has grown more dependent on global liquidity, or the ease with which assets can be converted to cash.
So, the rand is currently sustained by a commodity prices boom, as well as the fact that the world is awash with cash.
So what is a Reserve Bank governor to do? Sometimes, economic management is about cutting interest rates and praying for a miracle.