Weaker rand no silver bullet: Analysts

2010-12-13 19:06

Johannesburg - Economic Development Minister Ebrahim Patel's plan to weaken the rand by cutting interest rates is unlikely to gain support in government and would not increase the country's competitiveness.

His proposals on the rand are at odds with the policy articulated by both the central bank and the Finance Ministry and raise old questions over who exactly is driving policy.

Patel released his "new growth path" last month, a set of policy measures aimed at quickening South Africa's economic growth to create jobs for millions that continue to live in poverty, even 16 years after the end of apartheid.

"I do not think it's a good idea," said Tony Twine, economist at Econometrix. "Weakening the rand is an inflationary tactic which simply camouflages the inability of the economy to work efficiently."

The rand has gained nearly 30% against the dollar and the euro since the start of last year, helping to push inflation to 5-year lows and keep it within the Reserve Bank's 3% to 6% target.

But exports have been depressed, especially those destined to South Africa' largest trading partner, the eurozone as that region's growth has been sluggish.

Partly due to rand gains, the manufacturing sector has shrunk and shed hundreds of thousands of jobs, pushing unemployment to an official figure of 25.3% of the working force. The unofficial rate may be as high as 40%.

The rand is seen maintaining its gains into 2011, weighing on the manufacturing sector and the broader economy. At 5.5%, South Africa's rates remain attractive to investors.

Policy Confusion

President Jacob Zuma appointed Patel to reward the powerful Cosatu trades union grouping for helping him clinch the ANC's leadership from Thabo Mbeki. But so far, Patel, a former trade unionist, has not influenced policy and the "new growth path" is his attempt.

After the establishment of the National Planning Commission headed by former finance minister Trevor Manuel, analysts say it is unclear who has the power to drive policy in Zuma's cabinet.

"There is some confusion about boundaries between national planning and economic planning and there is nothing I'm aware of that clarifies what separates the two," said Adam Habib, deputy vice chancellor of the University of Johannesburg.

"There is no doubt that Patel's influence in part emanates from the unions, and if the unions are rejecting his proposals then he's got a serious problem," said Habib of union criticism of Patel's plan to put caps on wage increases.

For now, policy remains the responsibility of Finance Minister Pravin Gordhan, to the chagrin of Cosatu.

The power to change the Reserve Bank's mandate rests with Gordhan and setting a new rand policy would also be his prerogative, guided by the ANC's agenda.

Tensions have increased in recent months due to Cosatu's frustration with the ANC and analysts say eyes will be on whether Zuma will provide leadership and clarify roles.

Although some have speculated the alliance is near breaking point and Cosatu may break away and contest elections, both the ANC and its union ally have said they are committed to making the alliance work.

To keep Cosatu happy, the ANC may compromise on some of Patel's proposals, including increasing targeted support for struggling industries such as manufacturing.

Weaker rand no answer

The Reserve Bank and the National Treasury have said the rand is no silver bullet that will solve South Africa's problems with competitiveness, preferring a multi-pronged policy approach that includes tackling industrial policy and education.

The Reserve Bank has already reduced interest rates to historical lows in the past two years, cutting the repo rate by a cumulative 650 basis points to 5.5% and is less inclined to reduce them further.

Governor Gill Marcus said after the November MPC meeting there was limited room for further easing and the bank was not cutting rates to weaken the rand.

To deal with the rand, the Bank has opted to build reserves as and when appropriate, with the help of the National Treasury.

Analysts have long said that blaming the rand for all of South Africa's woes is a scapegoat and targeting it will not work.

"Monetary policy that targets the exchange rate will not address unemployment and the inequalities," said Lumkile Mondi chief economist at the Industrial Development Corporation.

"Such policies are very much appealing but dangerous and do not do anything for competitiveness," he added.

Nobel economic laureate Joseph Stiglitz, who is also on Patel's advisory panel, said in a statement that managing the exchange rate would be an appropriate policy for South Africa as it would help the economy to develop a diversified productive base.

  • Nasdaq7 - 2010-12-13 19:53

    What Patel wants to do by weakening our exchange rate is to lower the cost of labor. But our labor market is inflexible. In China the labor market is flexible - weakening the currency and employing more people produces more goods and services. It is cheap to employ more workers in China- that is why targeting the exchange rate - keeping it weak helps boosts exports and jobs. But in SA labor is expensive - a weaker exchange rate will increase inflation and strikes. So expect MORE strikes. MORE inflation under Patel. NOT MORE jobs. SA is not China where expanding the labor pool through a cheap currency helps. The more labor we employ, the more expensive everything else becomes.

  • Zorro - 2010-12-13 20:37

    Figures has never been a strong point of this group !!!!!

  • Hugh Robinson - 2010-12-14 07:59

    The joke is that the CHYaun and the ZAR are in round figures worth exactly the same in USD. This shows that the the real problem lies with the countries ability to be labour cost competitive. Our labour is paid far more than they are worth. They lack pride and accept being fired as part of the job whereas in China it is coinsidered an insult to the whole family if you loose your job. the opportunity to create a nation proud of their efforts has been lost this mean that we will never turn the corner and produce viable goods.

  • Johnathan - 2010-12-14 08:25

    I wouldn't put it exactly like Nasdaq7, but his main point is valid. A weaker rand is not an end in itself, lowering the relative cost of importing from South Africa is. Unfortunately, any visible "productivity increase" that results from the weaker rand will be slurped up by high real wage increases and the competitive edge will be lost. Meanwhile the cost of living will have risen due to the higher cost of imports, prompting even more wage increases in a vicious cycle. You can't have your cake and eat it too!

  • ono - 2010-12-14 11:37

    Twine is correct BUT only in a more perfect and competitive society unshackled by the evils of social engineering. With these race based restrictions, a weaker Rand at least limits job losses and gives us some chance of building an export led economy and create employment. Our ever increasing unemployment is unconscionable. It leads to crime and the export of our most intelligent financial return there.

  • Sean - 2010-12-30 15:06

    WTF, is everybody stupid? a interest rate cut will not weaken the rand it's myth, interest rates were cut by 4% this year rand has became stronger why? In the west the interest rates are close almost 0, why? in SA the prime lending rates are at 9% why? Simple maths, lower the cost of borrowing, people will borrow to buy machinery, to open businesses, to build new houses, factories, buy a tractor, to fit a solar water geysers, or buy a new car, whatever. All of this creates employment that's all that minister Patel wants. Why does Japan have a negative inflation rate? Economist couldn't avert the biggest financial crash in history, even with all their sophisticated data analysis techniques and equipment so in my eyes they don't know what they are taking about. The bankers still screwed them up. so it is time to screw with the banks drive down their easy profits let them work for their money. Go minister Partel we need new ideas we need a new direction. make the gap between haves and have nots smaller so we can all live in peace and security.

  • UC - 2011-01-11 16:37

    The panacea is a flexible labour policy, vacancies are not filled because of the risk of hiring. On one side we have lower competency standards and on the other hand inflexible laws, therefore one rather not hire compared to ending up with an incomptetent employee

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