Strong rand has SA in its grip

Like many other emerging markets, SA is having to deal with a strengthening currency.

This is the result of capital flowing in from investors searching for better returns on investments they have traditionally placed in developed economies.

Those markets are now experiencing slow or faltering growth after the subprime meltdown and subsequent recession.

However, the inflows have put pressure on domestic manufacturers because a stronger rand weakens their position compared to relatively cheaper imports that are priced in developed economies' currencies, such as the dollar and euro.

The view that the strong rand erodes exports and leads to the substitution of local products with imports appears to be borne out by many other developing countries, including Brazil, South Korea and Thailand, which have responded by devaluing their currencies.

Meddling with currencies is dangerous

However, Finance Minister Pravin Gordhan this week warned against this practice as it could escalate into a trade war and hurt the fragile global recovery.

"We are at the foothills of a major crisis. If we continue on this route it could result in a trade war and each country is going to put up barriers," Gordhan told the Consumer Goods Council of SA conference.

The rand has, with other emerging economies' currencies, been firming against the dollar in recent months. The rand hit R6.76/US$ last week, its strongest in almost three years.

Yet the motor industry, which is largely an importer, believes a stronger rand is preferable. Stuart Jackson, the financial director at JSE-listed Combined Motor Holdings, said the company would certainly prefer a stronger rand.

"Obviously, a stronger rand will help contain vehicle price increases as imports will come in cheaper," he said.

For the six months to August, earnings and headline earnings at CMH more than doubled thanks to customers' increasing confidence about their debt burdens. CMH deals in passenger and light commercial vehicles.

"The drop in interest rates from 13% to 10% obviously is a major factor which ensures that customers' bonds are now cheaper and they now have money to spend on vehicles again.

"Another factor is that banks have started to ease up on their stringent lending criteria. Although there have always been customers, there was no funding," Jackson said.

A double-edged sword

Brand Pretorius, McCarthy's chief executive, said the strong rand was a double-edged sword.

"If we say that local vehicle manufacturers need to expand their export market, then a stronger currency will be undesirable.

"But if we just talk about the local vehicle market, then a stronger currency will ensure competitive vehicle prices," he said.

Nicky Weimar, senior economist at Nedbank, said: "Certainly, playing currency wars will not be an option for SA because this game belongs to those countries with deep pockets. We could be looking at cutting the interest rate slightly further as an option, or perhaps we might follow Brazil by imposing a tax on short-term capital inflows, which has so far proved ineffective in stemming the upward march of the Brazilian real," she said.

Weimar added that the answer would be to come up with a measure, or a combination of measures, which would do the least damage.

"The danger is intervening to fix one problem - a strong rand - and then creating more complex problems in the future," she said.

Don't look at the currency in isolation

Goolam Ballim, chief economist at Standard Bank, said a country's currency was a significant determinant of that nation's wealth.

"We can't simply show benign neglect under the guise of allowing market forces to prevail or to defer to suggesting that the tools we may have are weak," he said.

Sizwe Nxedlana, an economist at FNB Capital, said the currency issue could not be looked in isolation; it was one of many factors that were important in the economy.

"For example, labour-intensive sectors such as agriculture, mining and other tradable services like tourism are important if we are to deal with the problem of unemployment.

''They are important because they are labour-intensive and they are likely to absorb young and unskilled people who are the hardest hit by unemployment," Nxedlana said.

Source: Business Times