Kempton Park – The depreciation of the exchange rate is a reflection of weakening institutions, South Africa Reserve Bank (Sarb) governor Lesetja Kganyago said on Thursday.
Speaking at the South African Chamber of Commerce and Industry (Sacci) convention in Kempton Park, Kganyago explained that the exchange rate depreciation has not boosted investment and exports.
“There is no doubt that should a downgrade transpire, it will be reflected in the exchange rate,” said Kganyago. Instead of being a reflection of global competitiveness, it will indicate a deterioration in South Africa as a desirable investment destination.
Depreciation is supposed to be positive for growth by boosting exports, but that has not been the case. Depreciation only improves competitiveness if it is not eroded by higher inflation, and the Sarb’s role in this regard is to keep inflation low, he explained.
He added that credit rating agencies have not downgraded South Africa below investment grade because of the strength of the country’s institutions.
Since 2011, the real exchange rate has depreciated by 26.8%, versus the nominal depreciation of 41.9%. Reasons for this include falling commodity prices while further political risk has impacted the exchange rate, due to falling business confidence. This is not a reflection of global competitiveness, and this is why the depreciating currency has not been accompanied by economic growth.
The trend of low global interest rates has driven investment towards emerging markets, he explained. “These inflows have given support to the rand over the past few years.” But the risk of the US raising interest rates has also impacted rand strength.
Kganyago added that institutional strength contributed to the confidence levels of foreign investors.
In response to a question about whether recent developments in the Hawks probe into Finance Minister Pravin Gordhan have undermined efforts of the investment roadshow, Kganyago said: “The roadshow was very successful. There were moments when team SA spoke with one voice.”
READ: Rand steadies as support for Gordhan grows
The roadshow did not involve only National Treasury and the Sarb, but also included chief executives of the JSE top 40 companies, the JSE itself and chief executives of key state-owned enterprises. “What came out very clear through the week is that South Africa is still a viable investment proposition,” he said.
He added that investors “voted with their dollars” and as a result, Treasury raised $2bn.
Recent developments are a reflection of South Africa’s young, vibrant democracy. Kganyago said the message to investors is that they can take comfort in the fact that South African institutions are “strong, resilient, and tested many a time,” and have been found more resilient than institutions elsewhere in the world.
He added that strong institutions should be supported by society, because they are in danger of being undermined. In a changing world, institutional change is likely, but that change should be positive and in the interests of broader society, said Kganyago.
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