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Category: Views

2015-11-11

18:58:34 Permalink Rand drops 30% in 12 months. Our SEMINARS show you how to benefit.   English (EU)

Categories: Views, 673 words

NOTE : There are several ways traders and investors can take advantage of (or hedge against) Rand weakness. Sharenet will be covering these at their national seminars, kicking off with Durban on 21st November.


Yesterday, the local currency traded at R14.30 to the US Dollar. The long-term structural disintegration of the Rand since the infamous PW Botha era is shown below:

Short-term current factors aside, such as China growth worries, strong US$, collapse in commodities prices and so forth, it is clear that the Rand is subject to a long-term structural decline. Many of the forces behind this decline are external (out of our control). For example, our heavy reliance on commodities subjects us to the gyrations of the fortunes of the commodities complex.

However, the local currency has also suffered from a long-term 'political & policy discount', encompassing concerns about both political stability and the sustainability of an 'investment-friendly' business and policy environment. These are clearly factors within our control.

External factors aside, the Rand will continue this structural decline whilst SA Inc. remains uncompetitive:

1.Whilst we import more than we export (trade deficit)
2.Whilst our Government spends more than it earns
3.Whilst we have a dismal savings & investment environment
4.Whilst we have skills shortages & poor educational outcomes
5.Whilst our mining & manufacturing sectors are in structural decline
6.Whilst the government continues to crowds out the private sector
7.Whilst government borrows to pay salaries & our debt climbs faster than GDP
8.Whilst the parastatals & SOE's continue to drain the fiscus
9.Whilst policy environment continues to aggravate private sector "investment strike"
10.Whilst all the ANC alliance partners don't get behind one economic development plan
11.Whilst we have an inflexible labor policy & hostile labor relations environment
12.Whilst government corruption & wasteful expenditure continue to escalate
13.Whilst critical infrastructure (electricity, water, roads) lacks long-term planning

Notwithstanding the current issues our country faces, it is clear from the chart that every presidential term was beset by some form of major Rand depreciation - with Mbeki subject to the most horrific currency crises midway through his first term, only to spectacularly claw back losses during the second half. Every president had his Rand cross to bear, but some presidential terms were a lot worse than others as the below graphic shows:

At this stage of the game, the Zuma administration has presided over the worst rout in the Rand since PW Botha, who had to contend with international sanctions and 41% of his presidential term in economic recession (grey shaded area in below chart.)

Zuma caught the tail-end of the 2008 Great Recession and thus-far has only 6% of his term in recession. However, looking at the recent movement of the economy, shown on the chart below via the SA Reserve Bank coincident economic index, it looks like Zuma may yet straggle two economic recessions, which is likely to place even more pressure on the Rand.

Under the Zuma administration, the Rand exchange rate has risen 8.6% per annum compound. Using this as a projection, we can forecast R18.5 to the Dollar by the time his second term expires.

Maybe we can get our act together and stage a dramatic R/$ turnaround, as with the Mbeki era. But Mbeki had a massive economic growth spurt from 2002-2008, propelled by a commodities super-boom to drive the exchange rate down from R13.5 to R7 to the Dollar. This commodity boom is now kaput and unfortunately we never used these good times to prepare for the bad ones (very few commodity exporters did).

So we cannot expect any external factors to bail us out- we will have to deal with the internal factors under our control (and there are no quick-fixes) or face the consequences of further Rand weakness. Just like critical infrastructure, management of the Rands' fortunes requires coordinated, multi-faceted long-term planning and execution on several fronts.

NOTE : There are several ways traders and investors can take advantage of (or hedge against) Rand weakness. Sharenet will be covering these at their national seminars, kicking off with Durban on 21st November.

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