12 November 2009
Johannesburg — ATTEMPTS to weaken the rand may backfire, given the clout of global markets and the potential cost to the economy, analysts say.
Most agree that the volatile unit - which looks set to surpass a 14-month peak scaled last month - is too strong for local exporters.
But revived global risk appetite may help the rand build on its hefty gains of nearly 30% against the dollar and more than 13% versus the euro so far this year.
It was trading at R7,35/ and R11/ late yesterday, as emerging market shares rallied for the sixth day in a row and gold prices rose to a new record high.
"The rand's strengthening trend is still in place and we expect it to move to R7,20 and stronger," said Judy Padayachee, a technical analyst at Absa Capital.
"The R7,20 level is actually quite a conservative estimate."
A move back to the key R7/ level, last seen in January last year, would prompt howls of protest from business and trade unions.
Economic Development Minister Ebrahim Patel said this week that the debate on the rand was intensifying but there were no moves afoot for official action.
Nonetheless calls for a more "competitive" exchange rate have mounted, with many warning that SA's expected recovery could be hampered by the rand strength.
But nobody can say with any conviction what level would be appropriate for the unit.
Importers benefit when it appreciates - which is important given huge spending on infrastructure - and its gains have helped to keep inflation in check.
Keeping the rand at a particular level would also be an onerous, if not an impossible, task. Once a depreciating trend begins, it is hard to halt, if it is driven by global markets.
"Nobody knows where the appropriate level of the rand should be," Sanlam Investment Management economist Arthur Kamp said.
A weaker rand now would help the trade balance but would fan inflation, which was already "high and sticky", he told reporters at a briefing on the economy.
Kamp said he was comfortable with a firm rand as it kept inflation and interest rates low, which was good for economic growth. It would probably be wiser to think of ways to dampen its volatility, which "caused uncertainty and constrained investment", he said.
The rand hit a six-and-a-half-year low at R11,87/ last October, when the global financial crisis struck. It scaled a 14-month peak at R7,29/ in the middle of last month.
"It's certainly a worrying level for the economy now," Rand Merchant Bank currency strategist John Cairns said. "Exporters are really battling, mining and manufacturing in particular."
The rand was stronger than R7/ between 2004 and 2007, when the economy grew by an average annual pace of 5%. The reason its strength hurts industry more now stems largely from high electricity and labour costs, analysts say.
By easing exchange controls in its medium-term budget last month, the Treasury took one of the few steps possible to weaken the rand - but it could do more.
Cairns said limits on the cash that institutions could invest outside SA could be raised, while the limits on money that individuals can take out could be abolished.
The Reserve Bank has also stepped up the pace of its buying of foreign exchange for reserves, which helps curb rand strength.
But SA could not afford to set the currency's exchange rate - as China does - because it does not have ample reserves. A tax on capital inflows, similar to measures imposed by Brazil, would weaken the rand but also hit foreign portfolio inflows.
This would hurt SA as it needed the capital to finance its current account deficit - unlike Brazil, which had enough direct investment to cover the gap, said Absa Capital economist Jeff Gable.
Nedbank senior trader Dave Gracey pointed out that the rand's rally was driven by global factors. Domestic fundamentals were "not encouraging" and when these took hold at some point, the rand would weaken. "Sentiment is a funny thing - you must be careful what you wish for," he said.
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