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Manufacturing Indaba 2018

'Managing' the rand won't help exporters

The managed currency band that the Manufacturing Circle called for in its submission to parliament this week might not be the panacea that will help South Africa become competitive.
The Manufacturing Circle told members of parliament's finance committees in its submission on last week's medium-term budget policy statement (MTBPS), that the most suitable foreign exchange policy paradigm is a managed float with a range of between R8.20 and R8.60 to the US dollar.

"The instability of the exchange rate means that planning around imports and exports is very difficult. Manufacturers have to get involved in risky derivatives to hedge any major exchange rate changes," the Manufacturing Circle said.

"The range of R8,20 to R8,60 is indicative and over time needs revision, depending however on global and domestic structural developments," it said.

However, analysts warned that trading in the rand to target a currency band would be costly and would not deliver the desired results over the long term.

"The markets are bigger than the Reserve Bank can take on," said independent analyst Ian Cruickshanks.

"Remember what happened in the previous dispensation when the Reserve Bank tried to stabilise the rand. It eventually depleted the country's reserves in trying to maintain the rand against the market."

South Africa had $41.09bn in foreign exchange reserves on September 30. The international liquidity position, or net reserves, which include gold and special drawing rights and exclude foreign deposits received, was $48.75bn.

Reserve Bank governor Gill Marcus has on several occasions said the bank will continue to accumulate reserves when possible but does not target a specific level for the rand.

Michael Keenan, currency analyst at Absa Capital, warned that efforts to manage the exchange rate might deter investors.

"If you start managing the exchange rate, you are seen as moving the goal posts," Keenan said.

"Everyone knows South Africa's anchor policy tool is inflation targeting. If you now suddenly start looking at the exchange rate as a policy tool, investors could be concerned that you are shifting the goal posts and that could be very detrimental to the country," Keenan said.

Keenan said that having the rand stuck in a certain range could create a structural inflationary impediment and would restrict the economy's ability to correct imbalances.

"If you have a big current account deficit, your currency is the variable that will adjust so imbalances can be rectified. If you reduce movement of the rand, you reduce the ability to rectify the imbalances," he added.

The Manufacturing Circle has called for a weaker rand to make South Africa's exports more competitive.

Trade data published this week showed exports fell by 7.7% in September and imports by 4.2%. The trade deficit for September was R13.8bn, the highest in three years.

Manufacturing Circle member Carel Wolhuter told Marcus at this week's monetary policy forum that some manufacturers are now picking up orders that they could not pick up five or six months ago.

The rand traded at around R7.50 to the dollar in March but has since depreciated to more than R8.60.

Marcus said she hoped that exports would pick up with the weaker rand, but added that it still depended on whether there was a market for exports.

"The question is what is happening in the world and in the markets. I think we should actively seek [new] markets [and] expand into the rest of the continent.

''The situation in the rest of the market, and especially Europe, is difficult. We would welcome it if the South African manufacturing sector took advantage of a more competitive currency and did succeed in getting exports," she said.

A recent spate of above-inflation wage increases as a result of violent strikes have led to questions about South Africa's international competitiveness.

Lesetja Kganyago, deputy governor of the Reserve Bank, said while the depreciation of the currency could lead to increased competitiveness, this will be eroded if unit labour costs rise too much.

Finance Minister Pravin Gordhan said in an interview after the MTBPS last week that competiveness is linked to a "very complex set of factors", including location, the labour system, labour costs, available skills and the support that different parts of the economy lend to particular sectors and production processes.

Source: Business Times via I-Net Bridge.


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