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11 Jun 2015 13:24
All emerging market currencies are suffering as investors move their money from emerging countries' financial markets back into developed countries such as the US. (Paul Botes, M&G)
The rand is
at its lowest level to date against major world currencies. This week we
heard reports that the rand had breached the psychological level of R12.50
to the dollar and R19.22 to the pound. In May 2013, we were told of the
psychological breach of R10 to the dollar, when the currency broke through the double-digit mental barrier for the first time in four years.
Why has the
rand weakened so much?All
emerging market currencies are suffering as investors move their money from
emerging countries’ financial markets back into developed countries such
as the United States.
During the 2008 financial crisis, most emerging
countries experienced high levels of foreign direct inflows (FDIs) as investors
realised emerging countries were still growing at significant rates.
But 2014 saw some improvement in the economies of developed countries. The US
– the biggest economy in the world – had taken the stance to
stimulate its economy though the Fed’s purchase of government and other securities to pump money into the system. This is known as quantitative
easing. This kept US interest rates at an all-time low. Low interest rates mean
a low return on investment and investors looked to developing countries for
higher returns. But that was then.
happened next?The US
economy has since improved. Employment figures are on the rise and
the country’s macroeconomic fundamentals are back on track: a stronger US
dollar, good employment numbers and the possibility that the US central bank –
the Fed – will increase interest rates again. With a big, stable and trusted
economy, the possibility of a rate hike is all that is needed to see FDI
redirected from emerging economies back to the US.
should we care about all this?You will be
poorer for it. FDI has a direct impact on the rand. When investment leaves
the country it means the demand for local currency has declined. When there is
a lower need for the rand, it depreciates in value and weakens.
South Africa is not a goods-producing country so we do not necessarily benefit
from the less-valued rand and because we do not produce goods, there is no
demand for the rand to buy the goods the country does not produce. The rand is extremely liquid and is influenced by FDI and currency trades. At the moment,
it is not an attractive currency.
it all mean?This means
higher food prices, which will lead to a higher inflation and eventual higher
interest rates. As the dollar strengthens, all dollar-denominated goods and
dollar-denominated commodities we import from abroad become expensive. We
will pay more for food. We will pay more for petrol. An increase in the food
and petrol price has a direct impact on inflation. And as Reserve Bank governor Lesetja Kganyago says, a volatile rand and increasing
inflation will lead to the Reserve Bank increasing interest rates.
Africa imports almost more than half of its domestic wheat and maize. We consume about 3.1-million tonnes on average and imports are
usually around 1.7-million tonnes of wheat. GrainSA adjusted its maize
import to 727 000 tonnes owing to drought. With a weaker rand, maize
and wheat imports become expensive and the already poor become worse off. Most
staple foods: mealie meal, eggs, milk, meat and poultry become expensive.
crude oil, which is denominated in US dollars. When the rand weakens
against the dollar, petrol becomes more expensive.
Africa’s inflation rate should be between 3% and 6% and we are currently at a
safe 4.5%. But the pressure on the rand caused by global factors will have
a negative effect on inflation, bringing it closer to the 6%. This will force
the Reserve Bank to increase interest rates. Interest rates determine the cost
of borrowing and affects everyone who has debt, be it a credit card, car
instalments or a mortgage. Everything becomes expensive and this is on top of
the already more expensive food and petrol.
And the solution is?Government,
the business sector and academics aren’t able to decide on whether the National
Development Plan, the Industrial Policy Action Plan or the National Growth Path
is the best policy for the country. They also can’t decide about whether there
should be minimal government intervention or major government intervention. Do
we nationalise the country’s strategic assets or do we allow the market to
dictate the best way to run the country? At any rate, there’s no solution to
ease the burden of the normal South African. You make have to look for a better-paying job, send your children to cheaper schools, feed them less and
make them walk everywhere.
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