Yo-yo rand wreaks havoc

The volatile rand is creating havoc for companies and investors. It lost 23% of its value in seven weeks, starting in early May, and has since regained nearly 10% of its value, trading at about R6,86 to the dollar recently.

This is good news for exporters and commodity producers, who complained for years that the strong rand was hurting them. Importers are now starting to feel pain, forcing them to hike the prices of imported goods such as cars and computers.

A stable currency is one of the cornerstones of the government’s Accelerated and Shared Growth Initiative for South Africa (Asgisa), which aims to halve unemployment by 2014. Most companies are happy with a somewhat weaker currency, but Brait economist Colen Garrow says the volatility of the rand’s gyrations hurts foreign direct investment. ”Serious investors do not like volatility in any market; only speculators like volatility. It doesn’t help that the rand is the second-most liquid emerging market currency in the world, after Singapore.

The weaker rand will also harm the poor in terms of rising food costs, something the government wants to avoid.

Ken Humphries, CEO of currency treasury group VFP Exchange, says the rand is unlikely to strengthen much beyond R6,80 to the dollar, but should remain stable at these levels for the next few months. Towards the end of the year, he sees the rand being as weak as R7,50.

”A weaker rand was inevitable, given the current account deficit of 6,4% and the speed with which the deficit grew,” says Humphries. He adds that companies were panicked into covering their currency exposures as the rand sailed past R7,20 in June, having become accustomed to a strong and stable rand for the previous two years.

The see-sawing rand is likely to impact on company profits, and is making it difficult for companies to plan. Those companies with a high import dependence, particularly those in IT and equipment imports, are likely to show weaker profit growth this year. However, those in commodity exports are minting money at the current level of the rand. The rand price of gold is up about 80% in the past 18 months, rescuing many marginal gold producers from an uncertain future.

The rand platinum price is up more than 70% over the past 18 months, and this has started to wash through the financial results of producers such as Impala Platinum and Anglo Platinum, both of which reported excellent results over the past financial year.

Coronation Fund Managers analyst Henk Groenewald says the impact of the weaker rand is more or less fully priced into commodity shares, ”but some industrial shares, such as AECI and Afrox, are lagging.

”What the rand does in the short term is not the big issue. We have been anticipating a weaker rand since earlier in the year and positioned our portfolios accordingly.”

Groenewald says the rand is probably close to fair value at present, and should remain around current levels for the foreseeable future, though he points out that predicting where the rand will go to is difficult.

Humphries says the dollar is likely to weaken against other major currecies, such as the euro and the pound, but this is unlikely to reflect in a strong rand. ”We are more likely to see the rand continue to weaken against the euro and sterling, less so against the dollar.”

The tipping point for the rand was the deteriorating current account. Garrow says, as a rule of thumb, a current account deficit in excess of 3% is a warning system of weakness to come. The rand has long since passed that point.

This is not to say that South Africa’s economic recovery is in jeopardy. Improving revenues from exports should maintain the economy on an even keel, though the Reserve Bank has signalled its concern over galloping consumer spending by increasing interest rates twice in the last three months. Garrow says a further one percentage point increase is likely before the end of the year.

Reserve Bank Governor Tito Mboweni says it will take time for this interest rate medicine to work its curative powers. ”But, psychologically, it sends a strong message to the market that consumers need to modify their spending behaviour.”

Until the current account deficit is righted, probably in 18 to 24 months, the rand’s weaker bias remains intact.

The advice from investment analysts is to make use of offshore investment allowances without neglecting the investment potential from domestic stocks as the country gears up for the 2010 soccer World Cup. The government has committed to more than R400-billion in infrastructure spending, with the private sector kicking in another R100-billion to R150-billion over the next few years.

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Ciaran Ryan
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