Ethel Hazelhurst
Economists are divided on whether the rand is heading into dangerous territory – or whether the weaker currency will be a boon to the economy.
The rand, which has traded most of the past week above R8 to the dollar, has been one of the casualties of the rout in emerging markets.
Jeremy Stevens, a researcher at Standard Bank, said Brazil’s real lost 15 percent against the dollar last week, the Russian rouble 12 percent, the South Korean won 10 percent and the rand 9 percent.
Investec group economist Annabel Bishop warned, if the rand weakened further to trade between R8.50 and R9 for the rest of the year, inflation would climb to 7 percent and remain out of the target range for the whole of next year.
The figure is well above the Reserve Bank forecast last week that inflation would breach the ceiling of the bank’s 3 percent to 6 percent target range between now and the end of the year, peak at 6.2 percent in the first quarter of next year and fall back below the ceiling in the second quarter.
Bishop said that inflation at 7 percent, at a time when the growth outlook was poor, would end in stagflation – low growth and high inflation.
However, the recent slide in the rand makes local goods relatively cheaper, which can promote local industry and create jobs.
Iraj Abedian, the chief executive at Pan-African Capital, said that his research showed an appropriate level for the rand would be between R8.40 and R8.60, as it would allow the manufacturing, tourism and agricultural sectors to become globally competitive.
He described the sectors as “critical to job creation”.
As to inflation, he said that the sharp spike would be temporary and would work itself out of the system within a year.
Stewart Jennings, the chairman of the Manufacturing Circle, which represents 35 companies, said though the rising cost of imported inputs would be “a negative” it would be far outweighed by the benefits to manufacturing.
But some economists doubt that. Tony Twine, a senior economist at Econometrix, argued that the boost to manufacturing would be temporary and would soon be eroded by higher costs of production.
The chief economist at Economists.co.za, Mike Schussler, said with the rand at weaker levels, consumers would suffer. “Prices of everything from petrol to mealies will go up.”
Even food produced locally will be affected, because farmers will be able to sell their goods in global markets, if they cannot get a good price at home.
Despite the rand’s recent performance, Bishop has a relatively upbeat view on the currency. She described it as oversold and said the exchange rate was likely to dip back below R8 before year-end.
And she argued that South Africa still has a lot of room to cut interest rates if growth stalls. “Even if inflation moves towards 8 percent, the Reserve Bank would likely cut interest rates as it did in 2009.”
Abedian went further, calling for rate cuts. He said Reserve Bank governor Gill Marcus had missed an opportunity on Thursday last week, when the bank’s monetary policy committee decided to hold the repo rate at 5.5 percent.
He argued that a rate cut would “send the right message” to the currency markets – that the bank would like to see a weaker rand.