Don’t weaken the rand, warn economists

Finance Minister Pravin Gordhan has opened the debate on whether or not to introduce measures to weaken the rand, which strengthened 28% against the dollar last year and is the second-best performer of 16 major currencies tracked by Bloomberg.

The strong currency has made exports less competitive and imports cheaper, raising concerns about job losses. Until now, government has said it won’t intervene in the currency market. However, it’s engaging organised business, labour and the public to assess its options.

“I don’t think we need a weaker or a stronger rand; what we need is a more stable rand,” said chief economist at Economists.co.za, Mike Schussler. “If we try to weaken the rand, it’ll cost us in inflation. Plus, if the Reserve Bank buys dollars, we’ll earn less in interest rates so we’ll lose big amounts of money.

We don’t have the manufacturing sector to be more competitive, even if we do weaken the rand. We’re not like China – only 30% of our exports are manufactured.”

International Monetary Fund (IMF) managing director Dominique Strauss-Kahn warned against attempts to devalue the currency at a recent lecture at Wits University, saying it was a short-sighted approach.

He said South Africa’s inflation target policy may have resulted in a strong rand and any measures to weaken it would scare off the foreign investors and capital that the country needed to fund its current account deficit. Strauss-Kahn suggested introducing more competition into the economy, especially into the banking sector, which would have a positive impact on inflation.

Nedbank chief economist Dennis Dykes said the rand was not “grotesquely overvalued”.

“The rand is one of a range of problems, including poorly developed infrastructure, inflexible labour markets, poor skills and education, and restrictive regulations in certain sectors, which make South Africa uncompetitive. It’s not just ‘a rand thing’. Exporters don’t seem to take advantage when the rand is under pressure but do complain when it’s strong.”

Weakening the currency is a tricky decision which many countries are grappling with. Several Asian countries have built up substantial foreign reserves to keep their currencies from appreciating, said Dykes.

“And Brazil imposed a tax on short-term capital inflows, on foreigners buying bonds or shares in the market. But the times of plenty might not last forever and investors might not want to come back into the market as a result of taxes.”

Government could also become more draconian and impose capital controls on money coming into the country. “This is not seen as a clever because foreigners might take their money elsewhere,” said Dykes.

Another option is to cut interest rates. “The problem is that they’d have to be cut very deeply. If they just cut at the margin, the rand will still look attractive and investors could buy even more rands on stronger growth prospects. “This could lead to a situation where domestic savings fall further and debt increases, which at some later point could cause a violent reversal of the rand.”