24 October 2008
editorial
Johannesburg — IT'S as much the speed at which the rand exchange rate has been moving up and down as the R11-to-the-dollar plus levels it has been hitting that creates that feeling of hysteria.
But in the midst of what Merrill Lynch has called a currency crisis, it's worth remembering that we have been here before, and more than once. There were the two emerging-market currency crises in the late 1990s, when the rand tanked. Then there was the 2001 crash, in which the rand sank to nearly R14 to the dollar.
A big difference between the 1996 and 1998 crises, and that of 2001, was that in each of the first two, SA wasted more than $20bn trying desperately, and in vain, to prop up its currency.
It took years to undo the damage to SA's balance sheet. By 2001, we'd learned to sit tight and not interfere with the markets. Later, we learned that the rand was a two-way bet, not the one-way bet everyone had imagined: it could, and did, recover its value, to the extent that for a long stretch the concern was that it was becoming too strong.
Then, we needed a commission of inquiry to tell us there was no conspiracy behind the rand's crash, that markets are what they are. This time, we won't need a commission. But we probably do need daily reminders that all this will pass, that we must stay calm and ride it out.
But it is not easy. The rand has lost more than 30% against the dollar over the past three months -- which is what prompted Merrill's to put SA, unfortunately, in the same category as Iceland, whose beleaguered currency has plummeted 93% over the same period. The rand is top of Bloomberg's list of the worst performers among major currencies, though yesterday we were at least in pleasant company, with the Brazilian real close behind.
Emerging market currencies generally have been savaged as global investors have liquidated all kinds of positions in risky assets to cover their dollar losses.
The "flight to safety" has featured too, as have concerns about global recession.
The rand is both an emerging market currency and a commodity currency, so that puts it in the front line, while uncertainty concerning the political transition adds to the mix.
And then there's the current account deficit. We may have a strong and well-capitalised banking system, sound macroeconomic policies and a robust economy, but we are one of the few emerging markets with a current account deficit. That's long made us vulnerable. And that vulnerability is now hitting hard.
It surely hasn't helped this week that the treasury put out gloomy forecasts for the current account in the medium- term budget and the International Monetary Fund (IMF) then released even gloomier ones, predicting in its latest SA country report that the current account deficit would jump to 9% of gross domestic product this year and 9,6% next year. This is bad news for a country that has already seen foreign capital outflows this year.
But the IMF's report was done in August. What's changed now is precisely that the rand is so weak.
That will help to make SA's exports more competitive, while a much lower oil price should help to reduce the cost of a major import, all of which should make for a narrowing of the current account deficit and will, eventually, get the rand back on an even keel.
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