Risk aversion hits rand
Gordhan speech weakens local unit as world recovery jitters boost dollar
October 29, 2009
By Ethel Hazelhurst
The rand tumbled further yesterday to be bid at R7.7862 to the dollar at 5pm from R7.6719 at the start of the day. It was 55c below its recent best point of R7.2365 two weeks ago.
Nicky Weimar, a senior economist at Nedbank, said the currency's weakness was due largely to "a rebound in risk aversion" abroad, which was driving investors into the "safe haven" of dollars.
She said the relaxation of exchange controls, announced by Finance Minister Pravin Gordhan on Tuesday, contributed to the fall. "It's difficult to quantify the relative impact of the two factors, but fears that markets have overshot seem to be dominating."
The reaction was seen worldwide. Sapa-AFP reported yesterday that European, Asian and US shares fell "amid renewed concern about the pace of US economic recovery".
Bloomberg reported that the benchmark MSCI world index of shares slid for a seventh session yesterday.
Although the impact of "global forces on the exchange rate has been bigger" than local factors, Weimar said that dealers might have taken their cue from the very clear message that the government wants a weaker rand.
In his medium-term budget policy statement, Gordhan announced the easing of a number of exchange control regulations. Weimar said the package represented "the most significant relaxations so far".
Moves to dismantle exchange control started in 1995 with the elimination of the two tier currency, which had forced residents to pay a premium to exit the rand.
Weimar said Gordhan had, for example, abolished the rule that forced exporters to repatriate their foreign revenue within ' days, rather than just extending the period.
Gordhan also made clear, in comments at a press conference ahead of his speech, that he would like to see a weaker rand, although he pointed out the difficulty of managing the currency, given South Africa's limited reserves of foreign currencies.
Weimar said at the present exchange rate "a lot of mines are living on the bread line". Exporters would like to see the dollar at R9 but "would settle for more than R8".
However the exchange rate at R9 to the dollar would be "very negative for inflation - especially if it happens very quickly" at a time when massive hikes in electricity prices will also be feeding through.
Inflation has breached the 6 percent ceiling of the Reserve Bank's target range each month since March 2007, although it moved closer to target last month at 6.1 percent.
The scrapping of some exchange controls was welcomed by Arthur Kamp, an economist at Sanlam Investment Management. But he questioned the effectiveness of currency weakness as a measure to improve the competitiveness of exports.
He said: "The route to competitiveness is best pursued through improving skills and productivity rather than the weakening of the currency."
Although the currency "is overvalued at its current level", he argued that "a relatively stable rand would entrench disinflation". And he pointed out that lower inflation would allow the Reserve Bank to maintain interest rates at a low level into next year, supporting a recovery in domestic demand.
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