Cees Bruggemans: Will history repeat itself? Rand skids, hikes rates

Cees Bruggemans steps back in time to the 2000-2001 rand crisis, which saw the currency slip from R6/$ to R13.85/$. He likens the current situation to then, which again sees the rand pushing R14/$, although he does say it’s not as major (yet).

The outcome from all of this was the inflation shock, which in turn triggered four 1% interest rate hikes. And while history offers no certainties on what the Reserve Bank will do next, Cees bets the bottom dollar that we are in risky territory. Yet another insightful piece, highlighting the possible pitfalls from a currency in freefall. – Stuart Lowman

By Cees Bruggemans*

We need to be consistent. If the rand is truly on skids again (as yet not a given, but something one can speculate about, as I did yesterday in “Cees Bruggemans – How low can the rand go? Half fair value? R20 to $?”), there are also consequences to dwell on.

At least if history repeats itself, firstly regarding the rand (skids?), secondly as regards possible SARB responses (rate hike follow-through as protection against inflation shock?).

The present and future offer an infinite range of scenarios, the past only one or two imperfect examples of what “could” happen (for it has before, even if under circumstances that then looked unique and not replicable but which in hindsight may serve as model, however rough and implausible).

There is a choice between the 1998 shock (Asian contagion instigated) and the 2000-2001 shock (of a different caliber, not primarily global crisis based). The second example looks more the plausible model to explore today.

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For the rand to go the whole hog as it did in 2000-2001, going from R6/$ to R13.85/$ before turning, a fall in real value of 55%, one needs drivers and facilitators to make it possible yet again. And if not quite a replica of what happened then, would it be less bad now (to what degree) or worse (if that is at all feasible)?

If rand fair value today is R10/$ (compared to being R6/$ in early 2000), we are still only in the foothills of a minor shock so far at R14/$ (bearing in mind the trade-weighted rand, too, moving somewhat less today than then?).

Still, all the drivers are in pace. A large SA current account deficit (5% of GDP) and minimal GDP growth (+1.6% yoy in 1H15, but steadily drifting lower) causes outsiders to term us one of five global ‘fragiles’. No imagination required to realise what happens to Fragiles when globally things get a little tense.

And things have become a little tense globally, with more instalments to go. In 2000 commodities were considered a global sell following a call on US interest rates going higher. Well, hello, today we face a scrum of tenseness, with China lowering the boom on commodity producers and EM suppliers, and America in the throes of a cyclical liftoff that will move short rates at least 2% to 3% higher and long bond yields at least 1% to 2% through 2018.

Such external tenseness is further augmented from within by the SA political climate, the many disruptive micro-policy stances, the directionless growth prospect (slowly eroding, drifting towards recession?), the fears about junk status (even when countered by Moody’s public statements).

Into this mix we still have to add policymaker statements, in our case as in 2000 primarily the Finance Minister and SARB Governor. Unlike 2000, they have as yet said nothing that could easily be construed as a mistake.

Even so, a few too many statements about the rand lately may have given some traders a sense of seeing the green light, giving them that added confidence to push the boundaries. And with every push giving more traders the Dutch courage needed to join the fray, and start help pushing.

That’s how the skids really became greased in 2000 and 2001.

As things stand, a lot of policy mistakes need to still be made to keep greasing the skids and allow the rand to be launched independently of its peers, singled out for special attention, and taken into the stratosphere of truly monstrous rand undershooting real value before the tide turns.

But if that were to happen, not at all a given so far, do not expect the SARB to stand by helplessly indefinitely. That rand shock of 2000-2001 gave rise to an inflation shock which in turn triggered a SARB response of effectively four 1% interest rate hikes (with a fifth coming which never materialised).

The rand, the rand. Oh Lord, the rand.

— Justice Malala (@justicemalala) September 7, 2015

So we are back to asking the obvious question. How far will events go this time in shocking the rand senseless, if at all, beyond a certain point (like the present R14/$)? If that question can be answered, one presumably can read off the SARB response from the historic record: 1% interest rate hikes for every 10% decline in the real rand BEYOND a point of no return.

This offers no certainties on what SARB will actually do. Circumstances are always unique, and nearly all the top SARB leadership are new to a situation like this, if one were to eventuate (though 2008 was a baptism of fire).

Still, one rows with the oars offered.

Are we entering risky territory? Bet your bottom dollar we are. Have been there, done that before. Even if the next experience may still be unique, whatever 2015 through 2018 may have in store for us.

*Cees Bruggemans, chairman, Bruggemans and Associates Consulting Economists