Politics and Society
A weak rand is bad news for the poor
Within hours of Zuma’s imprudent announcement that he was appointing as minister of finance an ANC backbencher and former mayor to 200 000 people in the West Rand (until residents burned down his house and chased him out), the South African banking index lost R128 billion in share value (its worst hit since October 2001), and the rand fell by 5.4% to a record low of R15.38 to the dollar. Within days, Zuma had to replace him by reappointing a former minister, Pravin Gordhan, to the job.
The minister Zuma sacked was doing a respectable job. He once joked that he slept like a baby – crying and waking up all night. While facing a fiscal cliff he was trying to keep the country from falling to junk status. He was barely maintaining the economy. He lost many battles. He was as unpopular as any man might be in charge of a household running out of money. Several unions however came to his support, expressing dismay at the sudden change of minister.
The mess Zuma has made should not be underestimated.
The reason South Africa has had the strongest economy on the continent is that it is the only country in Africa to have had a strong, internationally tradeable currency. You can easily exchange rands at any foreign exchange at Heathrow, but try asking for birr, cedi or ariary.
South Africa’s President Jacob Zuma. Photo: Stringer/Reuters
Too low a rand may help exporters and increase tourism, but it will not lead to a booming economy. You need an industrial base to have things to export and you need investment and the infrastructure to reap the benefits of the lower currency. Historically, there is no correlation between GDP and a weak currency. Trying to boost the economy by devaluing the currency to this extent is simply a race to the bottom.
Our biggest exports will probably be rands leaving the country, as the wealthy hedge their liquid assets from further devaluation, and skilled workers, who will flee to earn hard currency abroad.
The crucial question for the poor is what does a rand buy within the country. And a rand this weak only fuels inflation, eroding workers’ wages faster than their wages can increase. The poor will get poorer as they slip into the peso economy, as has happened all over Africa; once there, their prospects of lifting themselves out of poverty are even more remote. Getting inflation back under control is painful and difficult and it notoriously requires anti-poor policies and mechanisms that destroy jobs and small businesses.
South African child holding money. Photo: Reuters
As the currency weakens, the economy shrinks in dollar terms. This means non-rand denominated debt balloons, loan guarantees start to look frightening, and servicing of debt skyrockets, making it harder for the government to invest in the economy and leaving it with less money to spend on social benefits. Not only government coffers, but a falling currency has been shown to have a negative impact on South Africa’s already notoriously low domestic savings rates.
Agricultural land, prime property and local businesses all become susceptible to more foreign ownership as locals get priced out of the market. The country also becomes vulnerable to the big foreign players who can turn the screws and start to dictate domestic financial policy.
Years ago, a trader at one of Wall Street’s larger merchant banks told me that everyone was itching to short the rand, but that it was simply too expensive. Perhaps, at over R15 to the dollar, the speculator’s time has come.
