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Rand low won't last

May 30 2013 06:27
*Geoffrey Chapman
WITH reports abounding of a weak rand and four-year lows, I thought I would review the South African currency’s strength compared to the dollar, the pound and the euro.

Firstly, I noted that the rand’s strength has been depreciating since the early 1980s and that dips in the currency occurred even in the mid-1980s: point being, the current low of the rand is nothing new.

Furthermore, the weaker rand seems to be its natural state, given the 20-odd years of depreciation and the rand first hitting R10 to the dollar in December 2001 and continuing to fluctuate around this level ever since.

Believe it or not, the rand’s lows of 2001 and early 2002 remain the weakest it has ever been, compared to the three major currencies – although the 2008 low came pretty close.

If one considers the figure below, which tracks the monthly movements of the rand to the three major currencies from January 2000 to January 2013, one can see an almost cyclical pattern in the series.

There is a clear peak (trough, in terms of the rand’s strength) in 2001/02, another in 2008/09 and a movement towards another in 2013/14.

Source: South African Reserve Bank

Once can argue that, yes, the second cycle was shorter than the first but consider that the 2008 crisis was not a ‘natural’ occurrence. If we take the global economic crisis out of the picture, the rand’s strength might have persisted to the 2012 mark.

In other words, the global economic crisis caused a dip in the rand’s strength which would not normally have occurred.

As a result, in business cycle parlance, the boom or bull phase of the rand’s strength, it can be argued, lasted about 11 years. If the two clear dips in the rand’s strength are anything to go by, then the bust or bear phase will last about one year.

Is there something to take away from all this? Yes, fuel and food prices are high but the rand is not at its weakest.

Further, if the analysis above holds true – even to a small extent – the rand’s weakness will not last long, as compared to the likelihood of a stronger rand for the following 11 years.

As mentioned in my previous article, South Africans need to inform themselves.

The country is a net importer and so the weaker rand does equate to us importing inflation but, at the same time, it allows South African manufacturers and producers the opportunity to compete on an international market that faces ever stiffer competition.

I suggest we take this opportunity while it presents itself to try to make a dent in the trade deficit, and to compete with those previously out of reach.

Excessive imports, on the other hand, are due to the Reserve Bank, increasing the rate at which it prints money.

Between January 2003 and January 2009, the Reserve Bank printed roughly R66bn and in the four years since January 2009, the central bank has created R55bn, R22bn in the year since January 2012 alone.

With the increase in currency between 2003 and 2009, banks were able to expand credit to the private sector and this led to deep and persistent trade deficits over this period.

With the Reserve Bank printing money at nearly twice the speed in 2012 than during the pre-2009 debt bubble, the persistent trade deficit remains a consequence of the Reserve Bank.

 - Fin24

*Geoffrey Chapman is a guest columnist and trade policy expert at the SABS. Views expressed are his own.


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geoffrey chapman  |  trade


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