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Silver lining in rand crash

Jan 14 2016 06:48
Dumile Sibindana

THE rand/dollar exchange rate has come under close scrutiny, particularly after Zuma’s miscalculated appointment of an inexperienced finance minister, who was abruptly replaced by the more formidable Pravin Gordhan.

The manner in which the markets reacted to the shenanigans was predictable, with the rand plummeting to a then all-time low of R16 to the dollar. Although a semblance of market stability was restored after the redeployment of Gordhan as finance minister, the fact remains that the rand will continue to be volatile against the dollar and other major currencies such as the euro and the British pound.

There are a number of reasons for this phenomenon, most of these being external economic forces.

In December 2015 the US Federal Reserve raised interest rates for the first time since June 2006. As a global economic powerhouse, all predictions pointed to the fact that this would lead to significant changes in the markets, particularly in the foreign exchange markets.

Investors have started withdrawing their funds from emerging countries and moving them to the ‘safer’ US in anticipation of better returns. This will continue to put pressure on emerging currencies such as the rand, and some economists predict that the unit is likely to depreciate further, edging closer to R20 to the dollar at some point during the year.

READ: Rand's uncontrolled drop to cause further rate hikes - analysts

This then begs the question of what can we do about this seemingly unfavourable economic situation. As in all scenarios, there are potential winners and losers. Now is the time for South African firms to leverage their export muscle, in particular to focus on the US and European markets.

Potential for export-led growth

South African firms that export to these markets are set to increase their revenues in the light of the weakening of the rand, and this presents an opportunity for the country as a whole. An adjustment in our approach to an export-led growth model will add much-needed impetus to our economy.

The international trade arena is highly competitive and the largest share of global trade is concentrated in nations such as the US, countries within the European Union, China and the Asian Tiger economies, to name a few. Over the years these nations have accumulated considerable surpluses on their balance of payments, and the export-led growth approach played a role in their industrialisation.      

The EU is our biggest trading partner, with the US not far behind. Placing grreater emphasis on the production of value-added goods and downstream manufacturing will expand our base of export goods. This will make our exports to these regions more attractive, due to the relative cost reduction in importing South African goods resulting from a weaker rand.

This should in theory enable South African exporters to get more rands for every dollar/pound that they get from trade.

The Asian Tiger economies serve as an admirable example, reflecting the impact an export-focused approach to international trade can have on the economy. This strategy can have a positive effect on a nation’s development and economic growth.

However, we ought to be aware other forces were at work in lifting the Asian Tigers from developing to developed nation status. These included an exceptionally high rate of savings and investment, significant improvement in the education system and training, the rapid rate of adoption of technologies and others.

Improving our competitiveness in the international trade arena by using our weaker currency as an advantage is a good first step. Unfortunately, our quest to replicate the Asian Tigers economies will take considerable time and require incisive policy action.   

* Dumile Sibindana is a columnist for Forbes Africa magazine and editor of Banker SA. Opinions expressed are his own.       

rand  |  trade  |  exports  |  sa economy
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