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Rand reflects upside of poor political leadership

In a world where countries are competing to get their currencies as low as possible, South Africa’s poor political leadership has a surprising upside. A weak currency is the best way to boost exports and restrict imports – the key requirements of getting an economy going again. No rational human being would ask for this. But it’s worth remembering that there’s some silver lining in every dark cloud. – AH

I’m Alec Hogg. Here’s The Rational Perspective.

When you think about Zimbabwe, there’s not a whole lot of rationality that comes to mind, but actually, a few years ago, when the country switched from the Zimbabwe Dollar to the US Dollar (or the so-called ‘dollarisation), it was the most rational decision possible, at the time. The Zimbabwean Dollar – as you might well remember – had become virtually worthless. With the switch to the US Dollar, the economy started picking up again. It has contracted enormously over the past few years, but at least there is now growth.

I got talking to a Zimbabwean businessman over the weekend about exactly this. He explains that during the time of hyperinflation how they used to manage, was by taking in all the notes and coins at the end of the day, stuffing them into his boot, and driving off to the moneylenders. He said it was illegal, but there was no other way of staying in business – and then, the moneylenders would distribute the money internationally, to his suppliers.

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Unfortunately, quite a few of those moneylenders decided to abscond with his funds, so he had to build that into his margins as well – a terribly difficult way of going about doing business. Nowadays, he says it’s much easier, but also much more difficult. Dollarisation has not been everything that is it has held out to be. It certainly has lifted the economy of Zimbabwe, but it has also made prices extremely expensive.

Now, why is this?

Well, all over the world, we are seeing a race to the bottom by politicians and those who manage their currencies. The reason for this is that when you have an economic downturn, the best way to lift yourself out of it is to encourage the citizens of a country to export more and import less. In other words, buy more of the local product and buy less of that which is manufactured overseas. As a consequence, you won’t be sending money away.

Well, that is fine excepting when everybody is having a race to the bottom, which seems to the base at the moment. You find yourself in a little bit of a pickle and that’s exactly what’s happened to the Zimbabweans. They are finding that because the American economy is recovering so strongly and the US Dollar is doing so much better, their prices, relative to those of their neighbouring states, are escalating dramatically.

China is also feeling the same pinch. On Friday, a Chinese Central Bank decision to cut interest rates was met with great surprise. China has linked its currency to the US Dollar for many years and for most people’s money, it would continue to do so. But with cutting interest rates at this time, it’s worried about deflation – that’s the official issue – but perhaps there’s a lot more to it. Perhaps there’s more to come on that currency decline.

We’ve seen the Japanese also cutting their currency. The Yen has fallen dramatically and Euroland is trying to do exactly the same.



So, I ask you… When you have a look at South Africa’s weak South African Rand, which is down dramatically in the last 18 months, are we actually to be lamenting or to be praising the fact that we have a president who doesn’t seem to know too much about what to do with the economy?

He is referring (as we all are) to the National Development Plan, but not a whole lot of execution that’s happening. International investors are looking askance at what happens in South Africa and as a consequence of that, are ratcheting down the South African Rand.

We do know that the bloated cabinet and the costs that the political interference is having is not what the country really needs. Then again, if you are having a look at things from a broader perspective and the value of the exchange rate…well, there’s no doubt that there’s an upside to the mismanagement. Interesting, isn’t it?

This is The Rational Perspective.

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