Economist Mike Schussler believes that, contrary to common belief, the weak rand will not help foster significant economic growth in South Africa.
The South African currency has continued its slide against the greenback in 2014,- weakening as much as R10.90 to the dollar on Wednesday (15 January 2014), a level last recorded in 2008 against the US currency.
In a piece on Moneyweb, Schussler explained that, while some economists would say that the weaker currency would boost manufacturing, tourism and exports – evidence in volume data shows that this is not the case in South Africa, which is housing a “very sick currency”.
“We are taught that, normally, after about nine or twelve months of currency decline there is supposed to be a response in higher exports; often this did happen,” Schussler said.
“But this time around, waiting for that great export response has been a whole 36-month non-event and all the while the rand has declined. In fact there has been Zilch export response.”
Rand weakness is also a major factor in rising fuel prices, with petrol up 39 cents in January, and is expected to rise again in February.
According to Schussler, it’s a mistake to focus solely on the rand’s performance against the dollar, while ignoring the currency’s evident weakness against other currencies such as the euro or pound.
In afternoon trade on Thursday, the rand traded at R14.84 to the single currency, and as much as R17.86 to the pound.
“It has actually distracted from news about a very sick currency,” he said.
According to the economists.co.za’s data, South African export volumes are still below 2008 levels, while imports have grown 15%. Commodity prices have declined, and according to Schussler, commodity volumes have remained very flat.
To emphasise the point, the economist pointed to a “substantial” 36% loss in a trade-weighted index over the past 36 months, adding that another 10% drop could see the rand hitting R16.40 to the euro, R19 against the pound, and even pushing the currency to R12 to the dollar.
“The weak rand that many an economist said would be our saving grace…did not help,” Schussler said.
“In fact during the stronger rand phase we had much better growth by far (including manufacturing) and we created more jobs in the stronger rand phase than we are now.”
Schussler conceded that the currency could make comeback, but there was no evidence in the country’s current circumstances that indicates it is likely.
The main problem lies in capacity – with poor power capacity and insufficient infrastructure capacity to meet the needs of export demand featuring at the top of the list, while “some would argue we do not even have the skills set which is another capacity problem,” Schussler said.
the economic analyst also noted that, while tourism and professional services would help to strengthen the country’s position, high telecommunication and travel costs hamper those channels.
“Where SA should have had a positive short export response there is hardly any – zilch. The tank is empty and we are fooling ourselves that we can carry on as before,” Schussler said.