A weaker rand is not enough on its own

The rand is widely seen as overvalued, but deliberately weakening the currency to boost our exports will not work, unless measures are also taken to keep inflation in check.

Analysts saw suggestions from the Organisation for Economic Co-operation and Development (OECD) this week about how to improve economic growth as thought-provoking, particularly those on monetary and exchange rate policy.

Calls from the OECD for more transparency on the direction of interest rates were welcomed, amid confusion over the outcome of the Reserve Bank’s monetary policy decision this week.


Markets are pricing in a 40% chance that the Bank will cut its repo rate by half a percentage point to 6%, while the vast majority of analysts are betting that it will hold it steady.

“It’s almost like a lottery going into Thursday — clearly there is a bit of confusion which the Bank could easily rectify,” said Thebe Securities economist Monale Ratsoma.

Some analysts said SA’s authorities could also do more to boost the accumulation of reserves, which provide a buffer against external shocks and also keep gains in the currency in check.

An OECD suggestion that also went down well was a proposal to lift remaining exchange controls, as individuals face onerous red tape before they can take money offshore.

This would help weaken the rand, which many analysts believe is up to 15% overvalued, despite the fact it has given back most of its gains this year.

Given SA’s poor export performance over the past decade, the currency should be weaker, analysts say. This was the thrust of the OECD’s argument that the rand is overvalued and should weaken to support faster growth.

The main reason the rand has appreciated substantially over the past nine years is because of higher commodity prices, and foreign buying of resource-based shares — both global trends.

“My feeling is the rand is 10%- 15% overvalued, based on the deviation of the real effective exchange rate over its average in the past 10 years,” said Citigroup economist Jean-Francois Mercier.

“I ask myself if that is a good level if one considers that over the past 10 years the performance of SA’s exports has not been good, and a lot of market share has been lost.”

In volume terms, SA’s exports had grown by an average 1,6% each year over the past decade, Mr Mercier said.

If one moves back to 1998 to eliminate the effect of last year’s recession, average growth is about 4% — which is better, but still weak compared with other emerging market economies.

Rand Merchant Bank currency strategist John Cairns believes the rand is 14% overvalued, and should be trading at about R8,30/ rather than R7,60, as it is now. Against the euro, he sees an acceptable level as R10,80 rather than R9,80 now.

“There is a lot of anecdotal evidence suggesting that the strong rand is hurting exporters and leading to job losses,” he said. “It would benefit SA if the rand were to weaken but those who want the authorities to do this underestimate how difficult it would be to achieve — and the cost of doing so.”

There was no point in having a weak currency if inflation ate away those benefits, Mr Cairns said.

SA would have to put measures in place to ensure price increases did not accelerate — and these would have to include a buy-in for wage restraint from trade unions, which the OECD also recommended.

Mr Ratsoma highlighted a long- term problem — a weaker currency could boost manufactured exports initially but it would have to depreciate constantly for a long-term benefit to be felt.

Nonetheless, he agreed the rand was “way overvalued” and should be trading at about R8,50/.

SA’s authorities have shied away from saying they have a level in mind for the currency, as history shows markets test that level — and generally win.

The trick would be to make it clear there was an “equilibrium” level for the rand without implying that it was being targeted, which would be almost impossible to do.

Many economists agreed with the OECD that the Bank and Treasury could do more to step up the pace of building SA’s foreign exchange reserves, which still lag its emerging market peers.

“There’s a lot more the authorities could be doing to accumulate foreign exchange,” Mr Cairns said. Even though the Treasury had stepped in this year, its purchases of up to $2bn since December were still “too small to have an impact”, he said. The rand is one of the most liquid emerging market currencies, with average net daily turnover of 15bn in the domestic market alone, according to Bank estimates.

Against a trade-weighted basket of currencies, it has notched up a gain of only about 1% this year, on a nominal basis. But in its last quarterly bulletin, the Bank pointed out that the “real effective exchange rate” of the rand — which takes inflation into account — appreciated by 22,8% in the year to March.

This signified “a deterioration in the competitiveness of South African exporters” in global markets during that period, it said.

Analysts supported an OECD recommendation that the remaining exchange controls be lifted — particularly those on individuals — as getting the required approval from the Bank is a prolonged and frustrating process.

Source: Business Day