Stop moaning about the rand
LIKE star-crossed lovers in a failed relationship, the government and the rand need to get over one another. Ever since the Zuma administration took office, various government representatives in economic posts have complained about the currency exchange rate. This week, once again, Trade and Industry Minister Rob Devies said SA’s manufacturing sector was being undermined by an "overvalued" rand.
Yet everything we have learnt about the rand in the modern era teaches us two iron rules: First, that generally speaking over the longer term, the rand finds a value that is more or less appropriate. And second, that SA is not in a position to set the value of the exchange rate, rendering the debate about its "true" value moot.
In fairness to Davies, it seems as if he was going through the motions, and he did acknowledge, at the very least, the second iron rule. However, the crux of the debate actually lies within the first rule because this is where the disagreement resides. Is the rand in fact more or less fairly valued at the moment? Davies is not alone in making this assertion: importers would probably agree. Exporters probably wouldn’t. Such is the way of the world.
Yet examine the recent data a little more closely. There was a fairly common notion that the rand was "overvalued" because of the carry trade, the cross-border transaction whereby money is borrowed in a country with low interest rates and invested in a country with high interest rates, yielding the differential. Yet, since the beginning of this year, the carry trade has gone quiet, and there has, in fact, been a net outflow of investment from SA’s markets. The rand, however, has generally strengthened even more against the two big trading currencies, the dollar and the euro, during this period. The carry trade is clearly important at certain points in time, but not always.
The other justification for the rand being considered "overvalued" is the notion that SA belongs within a group of countries with "commodity currencies". The rand does tend to track currencies such as the Australian dollar, although it’s currently a bit weaker than the Aussie dollar. Yet this argument is circular. About 40% of SA’s exports are commodities, so if commodity prices are high, then it’s likely the economy will be doing well.
If that’s the case, the rand strength is justified. This is not market perversion; it’s market sense.
The core complaint about the supposedly "overvalued" character of the rand is that it handicaps SA’s manufacturing sector. Generally this is true, but it may be overstated. For example, the sector that outperformed in the most recent gross domestic product tally was the manufacturing sector, which grew 14,5% quarter on quarter, contributing about half of the strong growth rate in the first quarter of this year.
Neither is this unique: the sector grew in three quarters last year, albeit off a low base.
The essential problem is that exporters and the government are seeking a quick fix, and they feel the route to that is through a structurally weaker currency. But it’s more or less impossible, unless you have the great economic heft of a China or a US, to run simultaneously a strong economy and a weak currency.
The easy way to weaken the currency is to weaken the country, and no one wants that.
Instead of moaning about the strong currency, we should be celebrating it. If this is a reflection of the ba lance of good and bad in the economy, it’s a good one. This doesn’t mean there won’t be periods when the currency is totally out of whack. But this is not one of them.
Manufacturing might be hurting a bit at the moment but judging by the state of the global economy, this problem is not going away soon. It would be better to focus on underlying manufacturing prowess, which demands the hard task of skills development, innovation and hard work. That is the sustainable route. Laying blame on someone or something else is the conniving politicians’ way out.
Brics looking a little limp
IT LOOKS certain that the five Brics countries will be unable to agree on a single candidate from a developing economy to take over as MD of the International Monetary Fund (IMF).
The five countries in the bloc — Brazil, Russia, India, China and S A — have all said they want an end to the historic tradition of choosing a European to head the world’s biggest lender.
But their failure to coalesce behind a single candidate shows that the Brics are pretty useless in fighting a corner that matters in the global scheme of things.
Some have grandstanded behind a contender in their midst, but with only three days to go to the nomination deadline, not a single Bric name has been formally endorsed.
Even worse, the Brics have been unable to support the only emerging market candidate formally nominated — Mexico’s central bank governor, Agustin Carstens.
A Russian official has said the front runner for the post, French Finance Minister Christine Lagarde, faces "no real competition". And Brazil has said it will support Ms Lagarde on condition that Brazil gets a "strategic position" on the IMF’s board, and that she commits to reforms that increase the weight of emerging market countries at the institution.
The lack of consensus shows that, despite all the fanfare, the Brics bloc is largely a conceptual entity.
It may provide a useful forum to network and make bilateral agreements, but it is evidently not yet a force in the global arena. The one thing it has managed to do is to begin talking about trading with each other in their own currencies rather than dollars.
It may be useful to remember that the bloc was initially just an idea in the head of an executive at investment Bank Goldman Sachs.
The term Bric — which excluded SA — was coined for the four biggest emerging economies with bright prospects for global investors.
Since then, Goldman Sachs has come up with another brand for countries with promising investment prospects — the Next 11.
It groups Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam. Will they too take up the imaginary baton and informally unite. And, we wonder, to what effect?
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