Petrol, imports prove that strong rand is not all bad

Posted On Wednesday, 15 October 2003 02:00 Published by
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While exporters are complaining, ordinary consumers are reaping the rewards of a stronger currency

Economics Correspondent

RECENT headlines would make one believe that the rand's strength has been all bad news.

The currency's unprecedented rise from a record low of R13,85 against the dollar in October 2001 to a three-year peak of R6,85 last week, has been watched with alarm in many quarters.

Exporters are faced with falling revenues, threatening job cuts to save profits. With the export sector accounting for a third of gross domestic product, overall output in the economy has taken a knock as production is scaled back, while government faces the prospect of a worsening budget deficit as corporate revenues decline.

It all sounds pretty dire, so it comes as no surprise that with all the negative publicity surrounding the rand's extraordinary rise, the debate has focused little on the benefits of a stronger currency.

One sector of society that is not complaining about the rise of the currency is consumers.

Households have reaped the rewards of a stronger currency, from cheaper durable goods to a declining petrol price.

Inflation is almost half what it was a year ago, mainly as a result of the stronger rand.

A drop in imported prices has cut producer costs, resulting in producer inflation reaching an all-time low of 0,2% year on year in August.

Retailers have been slow in passing these savings on to consumers, yet consumer inflation has fallen considerably this year.

The Reserve Bank's targeted inflation measure, CPIX (consumer inflation less mortgages) has slowed from a peak of 11,3% year on year in November last year to 6,3% in August this year.

As a result, the Bank has been able to cut interest rates by 3,5 percentage points this year, with another one percentage point rate cut expected this week.

George Kershoff, a senior economist at the University of Stellenbosch's Bureau of Economic Research, says the prices of imported consumer durable goods, such as televisions and computers, have actually fallen in absolute terms, while import-competing sectors have been forced to limit price increases on products such as clothing, manufactured food and furniture.

"As long as consumer price increases are lower than wage increases, consumers will see an increase in real spending power," says Kershoff.

And it is not only consumers who have taken advantage of cheaper imports. Kershoff says a recent quarterly survey of the manufacturing sector by the bureau found that fixed investment was "surprisingly" on the rise, despite a recession in the sector.

It seems the exchange rate has presented manufacturers with a "golden opportunity" to invest in imported capital equipment and machinery, says Kershoff.

But still there are prospects of job losses, which would worsen a dismal unemployment rate of 31%.

Exporters such as mining and textile companies have warned that they might have to retrench workers as revenue growth is eaten up by the rand's advance.

They argue for a policy shift to create some weakness in the rand through further relaxation of foreign exchange controls, more aggressive interest rate cuts and for the Bank to intervene in the foreign exchange market to buy up excess dollars.

But will a weaker rand translate into stronger export revenue, prevent job losses and boost overall gross domestic product?

Not necessarily, says SCMB treasury economist Goolam Ballim.

Ballim says it is important to distinguish between the impact of the stronger rand and weak global demand. Sluggish global economic growth has resulted in exports to European countries dropping 20% in the last three quarters, while exports to the UK have fallen 10% in the past year, he says.

It is also worth noting that export volumes did not grow at all last year despite the boost to competitiveness when the rand fell to record lows, says Ballim.

Reserve Bank data show that export volumes contracted 4% in 2002, but exporters made a killing as a result of stronger rand earnings, with exports in value terms rising 21,5%, Ballim says.

"This tells you that the export dynamic (last year) was largely a price story," Ballim says.

"It's no surprise, then, that exporters are now hurting. After all, with the rand at three-year highs, the price story has evaporated."

While a weaker rand will mean higher export earnings, it is not a "panacea for export revival and job creation", he says.

"The remedy for the situation is not a weaker rand.

"The remedy is an upturn in the global economy. No overt depreciation in the currency will deliver that export nirvana."

But do the benefits of a stronger rand outweigh the negatives?

The answer differs depending on who you talk to, but there is consensus that a stable rand would make life for exporters more comfortable, since the volatility that has characterised the currency over the past few years prevents businesses from making optimal decisions.

Oct 14 2003 07:37:32:000AM Nasreen Seria Business Day 1st Edition

Publisher: Business Day
Source: Business Day

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