Zuma presides over worst Rand rout since 1984

2015-11-10 09:03

Yesterday, the local currency traded at R14.30 to the US Dollar. The long-term structural disintegration of the Rand since the infamous PW Botha era is shown below:

Current short-term factors aside, such as China growth worries, strong US$, collapse in commodities prices and so forth, it is clear that the Rand is subject to a long-term structural decline. Many of the forces behind this decline are external (out of our control). For example, our heavy reliance on commodities subjects us to the gyrations of the fortunes of the commodities complex. A rush to the emerging market exits in a global risk-off sentiment cannot be halted and effects all emerging markets. Even though the recent Rand depreciation looks bad, it has probably held up well with some of its emerging market peers. So we are more interested in the long-term multi-decade decline of the Rand than 2-3 years' depreciation.

Over the long-term, the local currency (as with other emerging markets) has also suffered from a  'political & policy discount', encompassing concerns about both political stability and the sustainability of an 'investment-friendly' business and policy environment. These are clearly factors within our control.

External factors aside, the Rand will continue this structural long-term decline whilst SA has the following challenges:

1.If we import more than we export (trade deficit)

2.If our Government spends more than it earns

3.If we have a dismal savings & investment environment

4.If we have skills shortages & poor educational outcomes

5.If our mining & manufacturing sectors are in structural decline

6.If the government continues to crowd out the private sector

7.If government borrows to pay salaries & our debt climbs faster than GDP

8.If parastatals & SOE's continue to drain the fiscus

9.If policy environment continues to aggravate a private sector "investment strike"

10.If all alliance partners don't get behind one economic development plan

11.If we have an inflexible  labor policy & hostile labor relations environment

12.If government corruption & wasteful expenditure continue to escalate

13.If critical infrastructure (electricity, water, roads) lacks long-term planning

Notwithstanding the current issues our country faces, it is clear from the chart that every presidential term was beset by some form of major Rand depreciation - with Mbeki subject to the most horrific currency crises midway through his first term, only to spectacularly claw back losses during the second half. Every president had his Rand cross to bear, but some presidential terms were a lot worse than others as the below graphic shows:

At this stage of the game, the Zuma administration has presided over the worst rout in the Rand since PW Botha, who had to contend with international sanctions and 41% of his presidential term in economic recession (grey shaded area in below chart.)

The current administarion caught the tail-end of the 2008 Great Recession and thus-far has only 6% of their term in recession. However, looking at the recent movement of the economy, shown on the chart below via the SA Reserve Bank coincident economic index, it looks like they may yet straggle two economic recessions, which is likely to place even more pressure on the Rand.

Under the  current administration, the Rand exchange rate has risen 8.6% per annum compound. Using this as a projection, we can forecast R18.5 to the Dollar by the time this second presidential term expires.

Maybe we can get our act together and stage a dramatic R/$ turnaround, as with the Mbeki era. We  still have the bulk of our second presidential term remaining to achieve this. In all fairness, we can only proclaim Zuma's legacy on the Rand once he has had the opportunity to complete his second term. But Mbeki had a massive economic growth spurt from 2002-2008, propelled by a commodities super-boom to drive the exchange rate down from R13.5 to R7 to the Dollar. This commodity boom is now kaput and unfortunately we never used these good times to prepare for the bad ones (very few emerging market commodity exporters did).

Furthermore, the US Federal Reserve are about to commence an interest rate hiking cycle which is going to force us to keep pace by raising our own rates to keep attracting offshore investor we require to fund our twin deficits.

So we cannot expect any external factors to bail us out- we will have to deal with the internal factors under our control (and there are no quick-fixes) or face the consequences of further Rand weakness. Just like critical infrastructure, or a companies' share price, management of the Rands' fortunes requires coordinated, multi-faceted long-term planning and execution on several fronts. Its going to require concerted effort from SA's citizens, the government and the private sector.

NOTE : There are several ways traders and investors can take advantage of (or hedge against)  Rand weakness. Sharenet will be covering these at their national seminars, kicking off with Durban on 21st November.

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