Mike Schüssler slams the theory that a weak rand helps SA grow.
“Tapering!” shout many, as the rand is supposed to decline when the Federal Reserve in the US stops
buying up bonds and printing money. But the rand index shows that even against other currencies such as
the euro, pound and the Chinese yuan, it is becoming clear that the rand is fast losing ground.
The rand has lost over 36% in a trade weighted index in 36 months.
We are taught that, normally, after about nine or twelve months of currency decline there is supposed to
be a response in higher exports; often this did happen. But this time around, waiting for that great export
response has been a whole 36-month non-event and all the while the rand has declined. In fact there has
been Zilch export response.
Exports in volume terms are still below 2008 levels while imports have grown 15% as South Africans in the
formal sector cashed in on above-inflation wage increases. Salaries increased with a cumulative 63%
since 2008 and the CPI with 31%, which according to some should have boosted the economy. So imports
went up and exports did nothing.
The rand is fetching record lows on an index basis which is weighted on the basis on the exports and
imports the country does with other countries. This is a much more scientific way of measuring the
currency and its relevant ups and downs.
I use this measure on a 22-work-day moving average basically giving me a running month basis to spot
trends in the currency. So while the rand moves up and down every day, the last few months have shown
a clear downward trend in the rand.
Other economies boosted by our importing
South Africans brought cellphones, tablets and flat screen TVs (all of which are 100% imported) with our
wage increases. Our mix of clothes, food and cars also became much more import-orientated than ever.
So our wage increases boosted the Chinese economy and probably the Indian, German and other
economies, but much less the South African one.
China malls have opened all around the country while Southern Asian traders open stores which
overwhelmingly sell foreign goods. Even our exports are now often just re-exports - not that this is bad as
we do add branding value and services to those exports. Every country in the world imports, but very few
have the lack of exports that we have and that is the problem.
While we all know commodity prices declined, information on actual volumes shows flat – very flat export
performance on the volume side too.
Local manufacturing has not hit the highs of 2008 either, despite the lowest interest rates in decades and a
government deficit that is increasing state debt levels fast to the levels we had in 1994. We may compete a
little better but we currently have lacklustre manufacturing that is very disappointing.
So the weak rand that many an economist said would be our saving grace, including Joseph Stiglitz and
his South African followers who told us this should work, did not help. In fact during the stronger rand
phase we had much better growth by far (including manufacturing) and we created more jobs in the
stronger rand phase than we are now. Most recent jobs are in the public sector which is not sustainable
without value adding goods and services from the private sector growing too.
We focus only on the dollar and ignore the rand weakness against the euro and the pound. A fairly weak
dollar is a little bit of a mystery to me; but be that as it may, it has actually distracted from news about a
very sick currency. Loosing over 36% in a trade weighted index in 36 months is fairly substantial. Another
say 10% decline this year would quite easily put us over R16.40 to the euro and R19 against the pound.
And yes, nearly R12 to the dollar.
Or course the currency could make a comeback but that would mean that either imports drop substantially
or investor demand for our financial assets goes up fairly substantially. Neither is very likely in present
circumstances.
Moreover the lower-than-inflation yields on short term saving rates did not help growth either and neither
did the much-higher-than-inflation-rate increases on formal sector wages help. No, our economy is actually
surprisingly flat with not much reaction at all to opportunities that the weaker currency was supposed to
bring.
This weak rand is not going away as the reason for our weak export performance also has some
fundamental factors. South Africa does not have enough power capacity to respond with more aluminium,
chrome or steel exports. We simply do not have the electricity to expand production or mining for
beneficiation purposes.
The fact is that even some railway lines and harbours just do not have capacity for an export response
when the rand weakens and rates are low. SAA is making losses and does not have the right planes to get
tourists here in droves and at the right price either as it focusses on a bailout rather than a potential tourist
windfall allowing other airlines profitable routes into SA.
Some would argue we do not even have the skills set which is another capacity problem, but one that can
be overcome by immigration in the short-term.
So where SA should have had a positive short export response there is hardly any, zilch. The tank is
empty and we are fooling ourselves that we can carry on as before. We cannot. Yes, the stock market will
boom - fear not. But for the last few years that has had more to do with growth outside SA and the actual
currency and commodity prices, rather than local growth.
So slowing Imports is what SA has to rely on to close the current account deficit. Until the current account
gap closes many everyday items such as food, petrol and medicine will also go up in price as the rand
continues to decline. The average person will feel poorer. Father Christmas is one of the last believers in
the South African inflation rate along with some asset managers, whose biggest claim to fame is to have
outperformed it.
Industry leaders are also more interested in chasing bigger rewards for less risk in other countries,
particularly in Africa. All my talks at conferences have to include views on Africa and conversations are
very more upbeat on Africa than on South Africa.
Seventy-percent of the turnover of the largest 60 companies on the JSE is outside of the rand area. Yes,
turnover. Every other company wants to be the next MTN, Rembrandt or Naspers. Even state-owned
enterprises gladly tell you about their foreign adventures, whether they be in Sao Paulo or Zimbabwe.
So expect a weaker rand as our savings are low and we need foreign money to provide for our import
needs, which, in order to catch up with our required infrastructure, demands even more imports. No
wonder even National Treasury sees rather large current account deficits in its forecasts.
Like the song about a hole in the bucket we first need to bring the capital goods in like boilers, trains and
planes for us to be able to produce and transport the goods and services to export. But that will lead to a
bigger hole in our country’s cheque account, so the rand is likely to continue to weaken.
Tourism and professional services may help, but here too we are slightly hampered by high
telecommunication and travel costs. A high oil price was always a problem for a country not situated at the
centre of the earth. Much of labour is not going to be responsive and that means ever-increasing costs and
very little reward here and bosses that phone to “ask if it is better in Zambia?” while the consumer asks
whether the “prawns are from Mozambique?”
Yes, but they’re farmed by an SA company ….
Mike Schüssler is chief executive at www.economists.co.za