How weak is the rand? Or to put it another way – how competitive is the rand? By my calculation the rand was at its weakest, most competitive and most undervalued in late 2001. At R11.98 for a US dollar or a mere 8.3 US cents for a rand, it was selling for about 23% less than its purchasing power (PPP) equivalent. If the dollar/rand exchange rate had merely compensated for differences between higher SA inflation and lower US inflation, the dollar would have cost no more than R7.70 in late 2001.
It was an expensive time for South Africans to visit New York and a bargain for Americans and Europeans traveling in SA. If differences in inflation were the only force driving the dollar/rand exchange rate we would now (in August 2018) be paying less than R10 for a dollar, rather than over R14.
The figure below tracks the real dollar and trade weighted rand since 1995, using December 2010 as the base month. A real exchange rate value of 100 would indicate an equilibrium for foreign traders. One where what is lost on the inflation front is fully made up with exchange rate weakness. As may be seen, the rand has been mostly undervalued since 1995 – the real rand has averaged about 90, or about 10% weaker than PPP on average and with a wide dispersion about the average.
The past performance of the real rand moreover suggests that theoretical PPP exchange rates are an unlikely outcome and not something exporters or importers should fear. Indeed they would be justified in assuming something of a permanent advantage in exporting – with rand prices for exports rising persistently faster than rand operating costs and vice versa. Implying a permanent competitive disadvantage for importers and their price offerings.
This history indicates that inflation differences cannot explain the direction the rand takes. It is much more a case of (unpredictable) changes in the market determined exchange rates that drive inflation higher or sometimes lower and lead the widening or narrowing of inflation differences between SA and its trading partners.
What then drives the exchange value of the rand? It is surely not any strong tendency for exchange rates to revert to PPP? The answer is that capital flows to and from SA drive the exchange value of the rand – as they explain emerging market exchange rates generally. The rand mostly follows the direction taken by emerging market (EM) currencies vs the US dollar as we show blow. It is the limited extent to which the rand behaves independently of its peers vs the dollar that explains the specifically SA risks that can independently drive the dollar/rand. These are shown by the ratio of the dollar/rand to the US/EM basket.
As may be seen, when we compare the performance of the rand to a fixed weight basket of nine other EM exchange rates vs the dollar, the rand has been in very weak company since 2014. Though in better company after 2016 when EM currencies and the rand improved vs the US dollar. The rand, as may be seen, did weaken in a relative sense with the Zuma interventions in the Treasury, especially in late 2015 when he dismissed Finance Minister Nene. The positive reaction in the currency markets to the succession of Cyril Ramaphosa in late 2017 may also be identified by an improved rand/EM ratio. But despite the importance of these political events for South Africa it would appear that the predominant influence on the exchange value of the rand over the years have been global economic forces, common to many EM economies, rather than domestic politics and policy intentions.
Moreover the potentially helpful effect of a weaker, inflation-adjusted rand on SA exports have been overwhelmed by unfavourable price trends themselves. Especially of the US dollar prices of metals and minerals that make up such a large part of our exports. These price trends linked to global growth trends themselves help explain capital flows. Capital flows in when the outlook for the mining sector and the economy improves and vice versa when the outlook deteriorates and prices fall away
As we show in the chart below exports and imports, valued in US dollars, grew very strongly, by about three times, between 2002 and 2010. The prices SA exporters received in US dollars more than doubled over the same period, as is also shown. The price and volume trends since then have been in the reverse direction – until very recently. The super commodity price cycle came and then went and the exchange rates went inevitably in the same weaker direction.
Yet not all has been bad news for SA exporters, especially those supplying foreign tourists – for whom the undervalued rand has proved a great attraction. The travel statistics of the balance of payments show a dramatic improvement in recent years. Travel receipts from foreigners, measured in US dollars, have been well sustained as payments for foreign travel by South Africans have trailed away (see below).
SA receipts from travel by foreign visitors are now running at about a US$10bn rate that now compares quite well with the value added by the mining sector- also shown in dollars below.
Would it be unfair to say that the achievements of SA tourism – extra income, employment and taxes paid – owe something to the exchange rate and perhaps as much or more to the helpful absence of any Tourism Charter? Conventional property rights have been more than sufficient to the purpose of increased supplies. As they would be helpful to mining output, threatened as it has been by the Mining Charter. 30 August 2018
