/ 13 November 2011

SA volatility hurting the rand

Sa Volatility Hurting The Rand

Volatility in South Africa’s exchange rate due to the eurozone debt crisis is hurting the country’s competitiveness and may limit economic growth in the coming year, Trade and Industry Minister Rob Davies told Reuters on Sunday.

Davies, visiting Dubai at the head of a trade mission, said the rand was still overvalued despite its slide against the dollar in August and September.

The currency plunged to a two-year low of R8.49 in late September from around R6.80 at the start of August and has since rebounded to R7.89.

“We saw the rand becoming more competitive, moving from around R7 to around R8 to the dollar, which was a move and better than it was before but still not at the level that places us in a competitive exchange rate,” he said.

Davies declined to specify what exchange rate would be appropriate for the rand but said that beyond its absolute level, its wide swings were hurting business sentiment.

Optimism and pessimism
“Volatility has absolutely nothing to do with anything that goes on inside the SA economy, it is entirely driven by whether there is optimism or pessimism whether the European Union is going to solve its problems.

“The volatility has impacted — manufacturers are not able to make long-term decisions because who knows what is going to be the situation. That has created a situation of uncertainty and a problem,” Davies said.

The shaky outlook for exports to Europe will weigh on the country’s economic growth next year.

“We are rather cautious about our growth forecast for the year that lies ahead. Instead of nearly 4%, we are looking at something just around 3% for this coming year,” Davies said.

In a policy statement late last month, treasury cut its 2011 economic growth forecast to 3.1%, rising to 3.4% next year.

Davies acknowledged there was little SA could do about its exchange rate, noting the central bank was constrained by its need to manage inflation. Last week the central bank said the inflation outlook has deteriorated, reducing market hopes for another interest rate cut.

G20 eyes reduction in volatility
The G20 major nations, of which SA is a member, is looking at ways to reduce exchange rate volatility and erratic capital flows but a solution has not yet emerged, Davies noted.

G20 countries have been discussing possible ways to fund a financial rescue of the eurozone; for example, fast-growing emerging economies such as China and Brazil might contribute money through the International Monetary Fund to the eurozone’s bailout fund.

Davies said the country would not be in a position to contribute significant amounts of money to such a scheme and that his government was instead trying to ensure that the international debate over saving the euro zone did not drown out discussion of measures to aid the developing world.

“We are part of the G20 and the G20 is looking at a collective set of policies and programmes to address the European crisis,” Davies said.

“But we’re also very concerned to make sure that the G20 discussion around development and infrastructure doesn’t get swamped entirely by the EU crisis.” — Reuters