Strong rand: blessing, curse

Strong rand: blessing, curse

2010-11-09 06:31

Johannesburg - South Africa's currency is trading at an almost three-year high against the US dollar, raising concerns about how strong is too strong.

That puts it in a similar category as several other countries, such as Japan, that are wrestling with a soaring currency. But South Africa finds itself in a unique position: While the government is under pressure to rein in the strengthening currency because it is hampering exports and perpetuating unemployment, the strong currency is also pushing economic growth in one of Africa's biggest economies.

South Africa's peculiar situation comes as currency issues move to the forefront of global debates about the balance of trade, with some observers raising the prospect of "currency wars."

For South Africa, the debate seesaws between those who seek action to tame the rand and those who see the strong currency as a blessing.

So far South Africa's all-important gold companies are weathering the currency surge thanks to inflated commodity prices. And the rand isn't showing signs of slowing - a healthy sign for South Africa, said Christopher Hart, the chief economist of Investment Solutions.

"In the last 10 years, when the rand has strengthened, we've experienced higher economic growth and lower inflation," said Hart, adding that a stronger currency also helps to attract skills.

A strengthened currency does hurt exporters, but many exporters also import so the effects are tempered. Imports can be bought cheaply when the rand is strong, said Ebrahim-Khalil Hassen, an independent South African economist.

For South African farmers, most of the big-ticket equipment such as tractors and hay machinery are imported, so a strengthened rand is beneficial, said Dr. Jim Rankin, secretary of a South African agricultural machinery trade association.

Additionally, South Africa, hoping to continue drawing foreign tourists long after the World Cup, may not be hindered by the strengthened currency because it reduces the cost of getting to South Africa in terms of airfares, Hart said.

But unions fear a too-powerful South African rand could deter efforts to drive down the country's 25% unemployment rate.

"In a world market where wealthier countries have massive protectionist measures in place, developing countries have to take exceptional measures to develop their industries," said Patrick Craven, spokesman for South Africa's biggest trade union federation, Cosatu. "Reducing the value of the rand is one way of doing that."

In a budget speech earlier this month, South Africa's finance minister said the country will focus on building its foreign exchange reserves and lowering debt to slow the strengthening currency. While South Africa's recently lowered interest rates have boosted the economy, currency overvaluation can threaten jobs and widen the deficit, Pravin Gordhan said. He said the rand exchange rate is about 12% above its average level for the past decade.

The dollar began a broad decline in early summer. Against the rand, it is down about 18% since late May and was worth about R6.80 on Monday. The US currency first dropped below R7 in September, for the first time since January 2008.

Government regulation of the currency can lead to retaliatory action on the trade front, Hart said.

Emerging markets such as Brazil and India have experienced pressure to devalue their rocketing currencies. Investors are borrowing cheaply from developed nations with near-zero interest rates to invest in higher-yielding markets. Last week, the Federal Reserve committed to buying $600bn in US government bonds to stimulate the economy. While the US has long criticized China for currency manipulation, now China is censuring the US for flooding emerging markets. Critics have said the policy could fuel trading of products, such as minerals, at inflated values, further weakening the dollar.

Iraj Abedian, an economist at Pan-African Capital Holdings, said he fears that if the Chinese and the Americans do not resolve their currency dispute, the next step will be trade measures and a wider currency war could erupt.

South Africa and other developing countries, he said, don't have much room to maneuver. They can't put up barriers to goods needed to improve infrastructure, for example.

"At the moment, the danger of currency wars degenerating to trade wars is really very, very likely," Abedian said. "The cycle of trade war is like wild fire, it catches overnight."