Overvalued rand constrains economy

The Bureau for Economic Research (BER) has revised its growth forecast for SA this year up to 3,4%, saying that if the global recovery continues, the outlook “is fairly promising”.

Its previous growth forecast for this year, affirmed in February, saw the economy expanding by 2,7% and quickening to 3,5% next year.

Its latest forecast for next year was little changed at 3,55%.


The economy shrank by 1,8% last year while SA was in recession. Official data showed growth picking up in the third quarter of last year and accelerating in the fourth.

BER chief economist Ben Smit said that, in his view, annual growth would not accelerate back above 4% partly due to strength in the rand.

“In my mind the rand’s level is hurting the real economy … in my view the rand is overvalued,” he told delegates at the conference.

The rand scaled a two-year peak against the euro and a five-and-a- half- month high against the dollar earlier this month. But yesterday it weakened 1,6% to R7,5185/, its weakest since early last month.

Reserve Bank governor Gill Marcus said at the conference yesterday that the rand was seen as overvalued by many market players, as well as the International Monetary Fund.

A strong currency erodes the competitiveness of local exports on global markets, which is worrying as factory output in SA is being spurred mainly by external demand.

“I think the bias is still towards a stronger rand,” Smit said. He sees the unit appreciating to below R7 to the dollar, before starting to weaken towards the end of this year — in line with most other analysts.

The BER sees the rand slipping to an average R7,85/ and R10,85/ in the fourth quarter of this year.

It forecasts further weakness to R8,38/ and R11,66/ by the end of next year.

Marcus pointed out that — like many other emerging market currencies — the rand was being buoyed by the global “search for yield” at a time when risk aversion was low.

That “has seen a wall of money moving into emerging markets, with consequences for their exchange rates”. In the year to date, foreign net purchases of local bonds and shares amounted to R35bn, she said.

That compared with net sales of R76bn in the second half of 2008 and net purchases of R90bn for last year. “The fortunes of the rand exchange rate followed these trends.”

Marcus outlined the difficulties of trying to manage the exchange rate, which the Bank does not try to do.

Direct intervention through the purchase of foreign exchange was constrained by the costs of “sterilisation” — a reference to mopping up the excess rand through debt.

The jury was still out on taxation of capital inflows, as applied by Brazil. And narrowing interest rate differentials also did not necessarily work if lower interest rates were seen to boost growth.

He said the BER expected the first hike in interest rates to take place in the first quarter of next year, in line with many other estimates. Prime lending rates are likely to rise by one percentage point to 11%.

Source: Business Day