The extreme valuation of the rand, especially against other commodity-related currencies, poses a serious threat to South Africa’s competitiveness in global markets.
Where other commodity-export economies are receiving a boon through the revival of specifically metals prices in US dollars the South African economy lags significantly as a result of the rand’s strength. Where metal prices in other commodity currencies are down by only 12.4% from the highs in May 2008, the Economist Metal Price Index is down by a massive 31.5% in rand terms and has hardly shown any growth since June last year. No wonder the South African authorities are considering ways to weaken the currency.
The strength of the rand is also impeding the South African manufacturing industry. With the rand trading below the purchasing power parity against the US dollar and the euro respectively there is little incentive to buy South African manufactured exports or to relocate production facilities to the country.
Whenever the rand reached purchasing power parity (PPP) against the euro it tended to stabilise around the PPP. When external shocks (global or regional crisis) developed, the rand depreciated significantly against the euro.
With the euro/rand deviation currently at -5% it is evident that the major run of the rand against the euro is about to end soon. What is clear, however, and cannot be argued away, is that the rand at its current levels is extremely vulnerable to any global economic surprises on the downside or any global and regional crisis. The currency is therefore priced for perfection.
But what are the reasons behind the rand’s extraordinary strength?
The main reasons are probably:
• The South African banks’ ability to withstand the global debt crisis of 2008/2009 has led to positive credit ratings relative to their foreign peers, while the country’s image has improved significantly. The country’s image has also received a major boost from the soccer World Cup.
• Significant long-term capital inflows as a result of the massive Eskom loans and the possible take-out of Nedbank.
• Significant short-term capital inflows as a result of speculation that the rand may improve further, together with relatively high positive interest carries.
With an increasing number of emerging economies raising interest rates it is only a question of time when funds will start to leave South Africa for better yields and lower risks.
This is definitely not the time to repatriate foreign funds. In fact, it is the time to move money abroad.
