The rand's fall - it's deja vu all over again

At around R13 to the dollar now, our exports must be quite competitive. They could get quite a lot more competitive soon. At the same time as being a temporary boon for the mines, a weaker currency should boost the trade balance because we’ll all have to cut back on imports. A weaker currency also means higher inflation, and higher interest rates, so pay off debt now.

I believe the rand will weaken further before it recovers, at some stage. However, guessing even medium-term foreign exchange rates is a mug’s game, as was shown when the rand dramatically reversed against the dollar in 2002 after careering downhill in 2001. Many South Africans who had shifted as much money as they could out of the country and into underperforming foreign assets must have felt sheepish as the rand inexorably strengthened and the value of their foreign holdings fell.

The rand went from a low of around R13 to the dollar — with lots of forecasts that it would fall to R20 to the dollar — up to the R6 mark.

Then, as now, hysteria about the decline of the currency rose in tandem with the currency’s decline, even leading to a commission of inquiry about a conspiracy of speculators benefiting from the rand’s fall. The inquiry was interesting but inconclusive. No smoking gun was found.

Almost the only person who forecast a reversal at the time was an economist called Jos Gerson, who based his idea on the similarity between the commodity dependence of the South African economy and the Australian economy, and what had happened to both currencies.

Based on a purchasing power parity comparison of the rand and the Aussie dollar against the US dollar Gerson reckoned the rand was undervalued, forecast that the rand would strengthen, and it did.

So what is the position now? A graph of the movements of three currencies of three resource-dependent countries, Canada, Australia and South Africa, with the rand plotted on the right axis, shows a superficial similarity.

Comparisons are misleading, however. Over the period of five years that this chart measures our Commonwealth cousins need only around 24%-25% more of their currency to get a dollar: we need around 75% more. Using The Economist magazine’s Bic Mac Index as a very rough guide, the rand is undervalued by between 30% to 56%.

It must be mentioned that if consumer price inflation is used to adjust the rand and the dollar, the R13 of 2001 would be equal to around R21 now. So the currency has further to fall to get the lows of 2001.

A number of other things have changed since the rand plummeted all those years ago. Chiefly the commodity super cycle seems to have turned against us decisively. I say seems, because over the years I have become aware of how perilous forecasting is.

As an example I recently found a 2008 article that posed the question: are the days of cheap oil over forever? Oil prices at the time were said to be heading towards levels that would be damaging to the world economy. Some even spoke of $200 a barrel. Then the global financial crisis hit, and obsession with oil prices evaporated as the market adjusted first to lower demand and then to much higher supply.

Crude oil was trading below $50 a barrel at the time of writing. I would never have predicted this fall, though some reflection might have reminded me that when prices surge, supply often appears as swiftly as magic. Oil’s sudden fall, like the depth of the financial crisis, took me and almost everyone else by surprise. Uncertainty now stalks the markets, so I am definitely not predicting what will happen to the rand dollar rate, despite all the signs that further falls are inevitable.