Currency Manipulation
Money Morning | 19 July, 2010
From Gareth Stokes, MoneyWeek editor,
Dear Money Morning Reader,
South Africa’s major exporters have a severe case of rand rage. Their efforts to flog goods and services in Europe, the United States and even China are being blocked on two fronts – by soft demand in the wake of recession, and an unnaturally strong rand. Thus far the local currency has ignored the doomsday prophets baying for its undoing, choosing instead to trade in a narrow band between 725c and 790c per US dollar. Even market experts agree the rand is hopelessly overvalued, suggesting R8.50/$ as a fairer reflection of purchasing price parity.
Suddenly labour representatives and private business are singing from the same hymn sheet. They want government to devalue the currency to push exports and job creation. You can follow their arguments on some levels. The rand has gained 24% against the Euro since 2009, and has firmed by some 3.9% against a basket of 15 currencies in Q1 2010 alone. This volatility – some might use the word trend – is pricing exporters out of South Africa’s second largest trading zone. As exports tumbled and imports surged, Treasury was left with another R2bn deficit in April 2010.
But the problem goes beyond a strong rand. The real problem is South Africa lags international manufacturers in the competitiveness and productivity stakes. Instead of sinking the rand private firms should be boosting productivity, and unions should be working with labour to lower input costs. These proposals don’t sit well with unions who have repeatedly negotiated massive wage increases without productivity concessions in recent years. If you’re in any doubt of the union’s power just consider the massive wage hike agreed to by Eskom to avert strike action – albeit illegal – from three Currency manipulation won’t help SA of its unions. The result is employers like Eskom and Transnet are funding wage increases well in excess of official consumer price inflation.
Trade minister Rob Davies – who boasts an impressive union background – has been vocal in his calls for a more competitive and stable currency. He wants government to exercise more control in setting the level of the rand against other currencies. And the media has had a field day with China’s decision to relax exchange control and afford foreign firms more access to their markets. Why, they scream, can South Africa not do something similar! The short answer is South Africa isn’t China.
The world’s dominant developing economy can afford to run a huge trade deficit for months on end due to its enviable hard currency reserves. Besides, China has been artificially fixing its currency for years. The real motivation for the Chinese decision was to rekindle domestic consumption. Back home consumers remain under the cosh! They face continued hardship due to unemployment and stricter lending regulations, despite the 550 basis point slide in interest rates since December 2008. Fixing the rand against the US dollar won’t have the same impact here.
Currency manipulation won’t shelter South Africa from the looming double-dip recession. “Talk of a healthy correction has given way to a rather gloomier prognosis,” writes John Stepek in this week’s feature article. The US economic recovery is derailing on continued job losses while the Baltic Dry Index – a great proxy for international economic activity – recently recorded 29 consecutive negative trading sessions. A second downturn – if not already upon us – is moments away. Turn to page 16 to find out how to protect your wealth as the recovery stalls!
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