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Cape Town - Rand weakness is the bitter medicine necessary to help repair the South African economy over time, said George Herman, head of South African Investments at Citadel Wealth Management.
He was responding to the latest volatility in the local unit and as the rand once again became a major victim of a new wave of risk aversion on Ukraine tensions.
Herman said the rand’s decline does not constitute a crisis, shock, surprise or overtly exaggerated move - "it is merely a global risk adjustment that serves as bitter medicine to an economy that struggles to increase exports while reducing imports".
On Monday the rand traded above R10.53/$ after reaching a new high of R10.39 over the weekend.
Herman told Fin24 that the weakening in the entire emerging market currency universe since last year has not been due to a weakening or change in the fundamentals of any of the emerging market countries.
"It was caused by a mass-exit of developed market investors harvesting carry-trades funded by low global interest rates."
Monday's rand weakness is the result of a stronger dollar due to new uncertainties about the Ukraine crisis and talks that the European Central Bank is planning to slacken monetary policy even further, which put pressure on the euro.
Herman said he expects the rand to stay on its weakening path because none of the underlying fundamentals that earned South Africa ‘fragile-five’ membership have changed.
"SA is still very dependent on foreign capital; the labour situation is worsening; elections are looming and we face the possibility of credit rating downgrades later in the year. You can expect the rand to resume its weakening path very soon," he said.
On South Africa’s relative competitiveness, Herman said it should improve over time due to the global risk adjustment and in so doing repair the ills of the economy.
“The problem is that our current account deficit is very slow to improve... the relative competitiveness of the rand hasn’t materially changed since 2012 because the currencies of the entire EM universe have weakened.
"As a result... the medium-term picture is one where the rand will have to weaken materially to achieve relative competitiveness and to reduce our dependency on foreign capital inflows.”
Herman said he expects global investors to divest further from SA.
On the future of local interest rates, Herman said the monetary policy committee (MPC) has been very circumspect in its global assessment of risk and rate movements.
"They have indicated their ability and willingness to adjust as seen by the January hike in the repo rate. The MPC needs to balance growth expectations, while maintaining price stability with a rapidly weakening currency.
"Fortunately the pass-through from currency weakness has been low, so there’s no crisis in rate policy."
He was responding to the latest volatility in the local unit and as the rand once again became a major victim of a new wave of risk aversion on Ukraine tensions.
Herman said the rand’s decline does not constitute a crisis, shock, surprise or overtly exaggerated move - "it is merely a global risk adjustment that serves as bitter medicine to an economy that struggles to increase exports while reducing imports".
On Monday the rand traded above R10.53/$ after reaching a new high of R10.39 over the weekend.
Herman told Fin24 that the weakening in the entire emerging market currency universe since last year has not been due to a weakening or change in the fundamentals of any of the emerging market countries.
"It was caused by a mass-exit of developed market investors harvesting carry-trades funded by low global interest rates."
Monday's rand weakness is the result of a stronger dollar due to new uncertainties about the Ukraine crisis and talks that the European Central Bank is planning to slacken monetary policy even further, which put pressure on the euro.
Herman said he expects the rand to stay on its weakening path because none of the underlying fundamentals that earned South Africa ‘fragile-five’ membership have changed.
"SA is still very dependent on foreign capital; the labour situation is worsening; elections are looming and we face the possibility of credit rating downgrades later in the year. You can expect the rand to resume its weakening path very soon," he said.
On South Africa’s relative competitiveness, Herman said it should improve over time due to the global risk adjustment and in so doing repair the ills of the economy.
“The problem is that our current account deficit is very slow to improve... the relative competitiveness of the rand hasn’t materially changed since 2012 because the currencies of the entire EM universe have weakened.
"As a result... the medium-term picture is one where the rand will have to weaken materially to achieve relative competitiveness and to reduce our dependency on foreign capital inflows.”
Herman said he expects global investors to divest further from SA.
On the future of local interest rates, Herman said the monetary policy committee (MPC) has been very circumspect in its global assessment of risk and rate movements.
"They have indicated their ability and willingness to adjust as seen by the January hike in the repo rate. The MPC needs to balance growth expectations, while maintaining price stability with a rapidly weakening currency.
"Fortunately the pass-through from currency weakness has been low, so there’s no crisis in rate policy."
