This article was written by Shaun Jacobs and published on 14 August 2024 on Daily Investor.
South Africa needs a stable rand, as businesses can adapt to having a relatively weak yet stable currency.
A stronger rand can hurt the earnings from key sectors such as tourism and mining.
After the elections at the end of May, many have viewed a strengthening rand as a vote of confidence in South Africa’s future and any weakening as a cause for concern.
The rand has been bouncing around this year, firming to below R17 to the dollar after the election but retracing to the mid-R18 range on a shift in global risk appetite post-Donald Trump’s assassination attempt.
The Reserve Bank’s decision to maintain interest rates at current levels while signalling its likelihood to cut at the next Monetary Policy Committee (MPC) meeting has further weakened the currency.
This may be reversed if the US Federal Reserve begins to cut interest rates before the Reserve Bank, as South African assets will become relatively more attractive.
However, Levantine & Co’s Managing Partner, Attila Kadikoy, believes neither rand volatility nor a strengthening currency serves the economy well. A stable currency would better serve the country. The offshore investment firm’s research shows that a significantly stronger rand may ease inflation but negatively impact key economic sectors such as tourism and mining.
These sectors earn in foreign currencies that are often stronger than the rand. A weaker rand benefits these industries as their earnings, in rand terms, are boosted as the currency loses its value.
In the case of tourism, this is due to travellers converting their stronger currencies into rands. A weaker local currency gives them more purchasing power in South Africa, increasing their spending and boosting the local economy.
For miners, this is because their commodities are priced and exported in US dollars.
A strong rand would make South African exports more expensive, undermining the competitiveness of companies selling their wares to the rest of the world.
“While a strong rand would benefit people who want to invest offshore, the rand is strong, so they get more bang for their buck. Also, for those travelling internationally, it would adversely affect industries like tourism,” said Kadikoy.
USD-ZAR Year-to-date
Kadikoy argued that a volatile currency poses an even greater risk to the economy.
The International Trade Administration cites the volatile rand-dollar exchange rate as one of South Africa’s main challenges because it complicates planning and long-term investments.
In particular, small and medium-sized businesses are hit the hardest as they lack the capital necessary to protect themselves from swings in the cost of imports or exports.
A stable rand would foster certainty and stability because economic stakeholders would plan for the future and thus make longer-term, strategic financial decisions that benefit the broader economy.
The resource sector is particularly affected by a volatile currency as mining companies and the agricultural sector need to know how much they can sell their products when they are ready to go to market.
They typically use futures contracts to lock in rand-based prices, around three to six months ahead of selling their products.
“An unpredictable currency makes it a challenge to know which way to hedge against a currency change, and in a volatile currency market, the cost of futures contracts also rises,” Kadikoy explained.
An unstable currency also impacts foreign entities’ appetite for making foreign direct investments.
A stable rand would also benefit the financial sector. Banks raise offshore syndicated loans priced off the country’s sovereign risk premium, which widens when lenders are unsure about South Africa’s economic stability.
“An unstable rand makes it challenging for local banks to know how much they would have to repay for the loan in Rand terms. They could factor this uncertainty into how much they charge customers by increasing their margins to compensate for these risks.”
Achieving a stable rand would depend on the government implementing market-friendly policies that encourage domestic companies to invest and give foreign investors confidence in the local economy.
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