Three cheers to the rand

2017-07-04 06:01

THE rand has proved to be remarkably resilient this year in spite of unprecedented political and economic upheaval, and the gloomiest predictions of many commentators and economists.

Sure, there is no question that the local currency has devalued considerably over time against that of its major trading partners. For instance, it was trading at R8,41 per dollar in June 2012, depreciating to as low as R16,85 per dollar in June 2016, while this week, it was trading at around R13,07 per dollar.

Yet, as Citadel director John Kennedy points out, it has been one of the best-performing currencies over 12 months.

This in spite of an unexpected recession, sovereign credit downgrades, the firing of a Cabinet and Finance minister, the release of the #GuptaEmail e-mails, service-delivery protests, falling fixed investment, rising unemployment, the uncovering of endless corruption and serious financial problems at many state-owned enterprises.

Incredibly, sentiment around the currency was battered once again this week. This time it was the public protector’s “radical” proposal to change the mandate of the Reserve Bank via a change to the Constitution, and after the release of a Mining Charter that mining companies say is unworkable.

But barring a few brief dips, the currency has remained steadfast throughout, trading at around R13 per dollar.

How long, one wonders, can the currency continue to take such a beating?

The value of the currency is important for a whole range of factors, and not just how much your rand will stretch on your next overseas trip. Its value plays a huge role in the price we pay for fuel, major food commodities and almost everything we buy from the shops.

Virtually every factory owner or businessperson needs to keep an eye on the currency as it affects either the value they receive for their exports or the value of the goods or services that they need to import to do business.

For ordinary folk, a depreciating currency may also mean that our pension savings will pay for a lot less by the time we retire. For news junkies, it is easy to become alarmed about the currency and the knocks it has taken. Every time there is major political uncertainty, or at the release of weak economic indicators, economists or commentators warn of a plunge in the currency, and usually, the rand does take a dip in value. However, often just a few hours later, it recovers once again to its previous levels.

The answer to this anomaly I believe lies in the dollar’s value, and how this has impacted South Africa and other emerging-market currencies.

Michael Hasenstab, asset manager at global investment group Frankel Templeton, wrote in May that 20 out of 24 emerging-market currencies appreciated in 2017, and he believes the trend is just starting. A major factor driving international investment into emerging-market currencies is due to a faltering dollar after a two-year rally.

The dollar’s value has sagged due broadly to a tightening of monetary policy in the United States and doubts over whether Donald Trump will deliver tax cuts and fiscal stimulus.

Another factor driving international investment in commodity-linked currencies, many of which are in emerging markets such as South Africa, is signs of continuing growth in China.

“The combination of a weaker dollar, lower yields in the developed world (European and Japanese central banks are still buying bonds) and faster global growth, has been supportive of emerging markets, including South Africa,” Old Mutual Multi-Managers said this week in a statement following last week’s raising of the U.S. interest rates.

We forget sometimes that the world economy outside South Africa remains weak, with developed country interest rates at unprecedented lows, and investors seeking better yields in countries such as South Africa, which offer higher interest rates. Nevertheless, the U.S. remains on track for moderate expansion and a fragile recovery in Europe continues. The U.S. dollar lost ground in May for a third month, partly explained by a strengthening euro.

China’s economy was also solid in May, and while some cooling is expected, it is likely easily to reach its 6,5% GDP growth target.

These factors point to a strengthening of the global economy in the months ahead, which should boost South African trade and investment. The stronger rand should also put further downwards pressure on inflation. In turn, lower inflation provides scope for th e Reserve Bank to cut interest rates.Old Mutual Multi-Managers said that lower inflation and potentially lower interest rates could be the silver lining for the domestic economy amid all the other bad news piling up. For now, it’s not inopportune to say three cheers to the rand.

• Edward West is the business editor at The Witness.

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