It's not the Rand's problem

2014-01-30 11:54

Find me an economist that saw that coming. Of all the factors that made an interest rate hike unlikely; CPI and PPI on a declining trend, cost absorption by companies that limits exchange rate pass-through, and of course there’s the palpable downside risk to growth, and yet no one saw that coming.

Wow, talk about immense pressure from Turkey (who raised its benchmark interest rate by a monumental 5.5% to 10% in the midst of political turmoil, a corruption scandal and a widening current account deficit. Sound familiar?)

It should not be surprising that we find ourselves at the mercy of foreign investors. In 2010, large capital inflows and a strengthening rand was a problem for the economy. In fact, it was an economic headache for emerging markets. South Africa saw as much as R100 billion in foreign capital flown in as the Reserve Bank maintained a substantial yield differential between us and the rest of the world. And the South African Government had done nothing remarkable to dramatically create an enabling environment for foreign investment. Much of those inflows were portfolio flows. And now, 2014 is here and we still have a substantial yield differential but yet foreigners are still taking their money and running. Exports aren’t doing as well as they weren’t when the Rand was strong. But one thing is different: we cannot now blame the Rand’s weakness on emerging market contagion alone.

Back then, in an attempt to weaken the Rand and slow the capital inflows, the Reserve Bank added to its reserves and lowered the repo rate to a 30-year low but the foreign capital kept on coming. This time around an interest rate hike should’ve been no surprise when the Reserve Bank attempted to stabilize (and strengthen) the currency. But what makes us think that an interest rate hike would all of a sudden bring those foreign investors back. The justification for an interest rate hike because of suspected pressure from the Turkish central bank and emerging economies as a whole to hike interest rates that would avert a currency crisis and make investment more attractive is absolute bollocks.

What we have is more severe than substantial yield differentials. We are facing a structural problem, and as long as we don’t fix those problems we are going to continue to see these short term capital inflows and outflows. I mean, how much really was the 2010 capital flows in portfolio investment and what went to fixed investment. I don’t think the Rand at current levels is something that should be worried about if the Government is serious about getting its ducks in a row. Not only that it follows through on its commitment to the National Development Plan but also its dissaving problem and its addiction to conspicuous current consumption.

But, honestly, how can two-thirds of an economy’s GDP be made up of services? And when we have declining primary and secondary industries we’d be supportive of a weak Rand. Proponents of a weak Rand would say that it is absolutely essential for export performance, manufacturing output and job creation. Nonsense. Investors ration the same view in platinum; the Rand’s weakness and higher platinum prices’ boost to company earnings far outweighs the loss of income due to strikes. Proponents would also say that we need a weak-Rand policy because there are so many unskilled and semi-skilled people out there who are unemployed, and how a weak Rand would help boost manufacturing output. Well, we have a weak Rand. Now what?

The truth is, an efficient and vast rail freight and electricity supply network would go a long way than a weaker Rand. And a higher interest rate would do a lot to reign in on our gluttonous appetite for fancy, branded imports.

The only ones who are to blame are ourselves: consumers and their insatiable demands for imports and companies’ lack of enthusiasm to innovate and build South Africa’s domestic productive capacity.

Unless we build this country, develop solid agricultural, mining and manufacturing sectors, and support small businesses and encourage innovation, our reliance on the rest of the world to pay for our standard of living is going to continue to cost the Rand dearly.

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