The weakening Rand has everyone in a state. Everyone with money, that is. Artists and hobos probably couldn’t care less. But with our currency falling to five year lows against the Dollar and establishing record lows against the Euro, things are looking bleak indeed. We asked our economics expert, David Mayfield, to tell us it was all going to be alright. He didn’t.
When a currency comes under pressure it is always difficult to determine how bad it’s going to get. That said, one can easily determine the direction and that is clearly to the downside. The primary reason stems from negative international perception towards emerging markets in general and South Africa in particular. People are generally fearful of investing in any risky market.
One must bear in mind that a lot of inflows (demand for Rand) stem from investment in SA stocks and the purchase of SA assets. These stocks do well when the economy is growing fast, which it has done for the last while (averaging three times more in the 2000s than it did in the 1990s - and people attack the ANC?), but with growth set to fall to around 3%, returns will fall significantly.
The insecurity of our economy means less people will invest in SA. Why would you take the risk of investing in an emerging market if the gains aren’t that good?
Why then is our growth then in doubt? Well, for one, the global decline (US, UK, Europe and Japan) means our exports should be softer this year (so the demand for rand declines further) as those countries can't afford to spend as much on exports. Also, the electricity crisis means companies will be weaker. Worse than that, the electricity calls into question some investment decisions that the international community were planning, which also would have led to more demand for Rand. Uncertainty is higher, but likely reward is lower. And people only really invest in risky economies if the gains are high.
What is also not helping is South Africans sending their money overseas. It’s called “capital flight”. Then, because SA’s inflation is running at 10% against the UK’s at around 3%, our export products are rapidly becoming relatively more expensive at a rapid rate and so demand is declining.
Then, the long term health of an economy is often viewed by looking at a countries current account (inflows less outflows). And ours is at an all-time high. We need inflows of foreign direct investment to cover our trade account (exports less imports). But foreign investors are pulling out. Between January and March this year about 100bn has left the country where usually 100bn enters the country. Add to all of this the political uncertainty and you begin to understand why international investors are scared to invest here.
All of this means the demand for Rand declines, which causes the currency to depreciate. Some predict the slide will continue and others think the currency will rebound. Everyone is unsure. I think it will get worse before it gets better. However, I think sentiment is a long way off the reality and the Rand will recover. Just how far out it goes before it starts coming back is anyone’s guess.