December 2015 is a month that will be remembered for President Zuma’s ill-considered decision to dismiss Nhlanhla Nene as minister of finance.
A new report published by Gerhard van Onselen, economic researcher: Solidarity Research Institute (SRI), shows how the decision caused substantial upset for the rand on the international currency markets.
The fallout from this event was severe, and once again placed the weakness of the rand at the forefront of public discourse, the report said.
The weaker rand also complicated the context in which finance minister Pravin Gordhan had to present his February 2016 budget speech.
The rand regained some of the value it had lost after Nene’s dismissal, only to become volatile following the minister’s speech.
Even before Nene’s dismissal and late February’s budget volatility, however, van Onselen noted that the rand had been steadily depreciating against the dollar.
“The post-Nene exchange rate volatility is not the entire story,” the researcher said.
A mere five years ago in April of 2011 the rand traded at around R6.60 to the US dollar. Since then, highs of around R16.80 have occurred, Solidarity said.
Solidarity highlighted several salient points in the report:
- Since April 2011 the rand has gradually lost considerable value against the US dollar. The rand has weakened from around R6.60 per US dollar to around R15.32 per dollar (14 March 2016) – depreciation of nearly 60%.
- While adding shock to the rand-dollar exchange rate, Nene’s dismissal actually contributed a relatively small part to the overall depreciation trend in force since April 2011.
- The rand has now far surpassed the previous historic lows of around R13 per US dollar, a value last seen during December 2001.
- Since 2000 the rand-dollar exchange rate has displayed significant cyclical volatility. Focussing on the period from 2000 to the present, two major rounds of appreciation and three major rounds of depreciation have occurred.
- A short-term reversal from the post-Nene blowout is likely and appears to be already in progress. It should not be confused with an overall change in the bias from rand depreciation to rand appreciation.
- The longer current round of depreciation (April 2011 to the present) appears less driven by external economic shocks and more driven by adverse domestic policies and laws.
- In reality, South Africa’s inflation adjusted GDP per capita growth, measured in US dollar, has been largely stagnant since 2007, and is worse than a number of countries facing a weak global economy and with similar exposure to metal and commodity export.
“In the long run a currency reflects the fundamental economic factors of the government that issues it. Those fundamental factors are mainly local factors and not external ones. Government determines the local policy environment that can stifle or stimulate economic growth,” Van Onselen said.
He said that without a significant deviation from damaging policies and laws, the rand will continue to underperform.
What does this mean for you?
For the man on the street a weakening currency holds negative consequences, the report warned.
These include more expensive imports, faster-rising domestic prices, likely interest rate hikes, cost-pressures on businesses, retrenchments, and general insecurity in the labour market.
The current round of rand weakness is therefore harmful to most people in SA, Van Onselen said.
“Though there are always external shocks, policies adverse to economic growth are playing the largest part in the weak domestic economy. These are internal factors and they can be reversed by government.
“Economies are highly resilient and can recover quickly, returning to much needed robust growth. What is required is a reversal of harmful policies and laws and much less state interference in the economy.
“Unfortunately, unambiguous mentions of such freedom – driven reforms were largely absent in the February 2016 national budget speech,” the report said.
A full copy of the report can be found here