Finding fair value for the rand is a fool's errand
October 10, 2003
How quick we are to forget. In the mid-1980s, South Africa's exchange controls were at their most restrictive.
With little money coming in or going out, the rand was stable.
Accepted wisdom was that there was no need for companies to take forward cover.
Then came Rubicon and the rand crashed. Numerous companies, which had heeded the advice of experts to dispense with forward cover, crashed with it.
Today, as the rand strengthens, the temptation is again to avoid forward cover.
Seven years ago the rand declined to R4 to the dollar. It was considered a calamity. How could we possibly manage with such a weak currency? Today this exchange rate would be considered a calamity for being far too strong.
Three years ago, as it began to approach R7 a dollar and R11 a pound, there was dark humour about the 7/11 rand and despair about it having become a Mickey Mouse currency.
Companies did not know how they'd cope with the effects of such a weak rand on profits and employment.
Today a rand trading around these levels is considered too strong; profits are smashed and retrenchments widespread.
Two years ago the rand was touching R13 to the greenback and R20 to sterling. Such was the national crisis that the government appointed a commission to investigate the causes.
At the time the currency was considered a one-way bet.
Accepted wisdom was to get out of the rand, at virtually any cost, and there were no more popular investment products than those that enabled the switch to offshore funds. Today those investors are counting heavy losses.
And now the rand is considered strong at levels where quite recently it would have been considered weak.
The chorus, certainly not without merit, is for the rand to weaken if further job losses are to be averted, exporters' profit margins restored and tax revenues protected.
The rand's abrupt reversal, unforeseen by experts, has destroyed windfalls that were planned for perpetuity.
Since memories are short, be reminded that a weakening rand also has damaging consequences.
To mention some: higher inflation, which is seriously destructive of jobs and savings; more expensive capital goods, particularly imported plant and machinery needed by local manufacturers to be competitive; accelerated movement of local funds to hard currency destinations; and the export of skills. We've seen it all before.
How much weaker must the rand become before it is at the "right" level?
Where is the correct balance between wealth depletion for rand savers and wealth enhancement for dollar earners?
At present, a fair value for the rand is widely held to be in the R8 to the dollar vicinity.
But fairness is not a concept with which currency markets are altogether familiar. In these markets, the rand is a minnow.
Whatever the profound arguments on fiscal management, trade balances and the rest, the rand will continue to be buffeted by a dollar whose strength or weakness is gauged in relation to European and Asian currencies.
South Africa's concerns with the adverse impact of a strong currency on export earnings pale in significance against Germany's and Japan's, but they are no less real or easy to manage.
The Reserve Bank can adjust interest rates. However, to expect it to be master of the rand's destiny is to expect the impossible.
Rand stability is a distant memory. By now we should have learned that there is no quick fix and no prediction that will be accurate, except by accident.
Allan Greenblo is South Africa adviser to FTSE, the independent global index company. He writes in his private capacity
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