South African Rand continues to lose ground against the US Dollar
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Category: Economics and exchange rates
Date: 18 October 2022 We take a look at the continued decline of the South African currency, the Rand against the US Dollar. The poor currency performance has an impact on South Africa's underlying inflation rate as South Africa imports large quantity of goods that is not manufactured locally (due to excessive labour costs, no reliable energy source, productivity problems, infrastructure problems to name but a few)
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Performance of the Rand should be a concern to all
You might be wondering why people are worried about the South African Rand's performance against the US Dollar and other major countries across the world. You not planning on travelling the world soon so you dont really care about the exchange rate. Well the truth is you should be very concerned about the performance of the exchange rate as it has an impact on almost all facets of your life. Reason for this? South Africa imports a lot of goods. And there are various reasons for this. Some items we cannot manufacture or mine locally (think about crude oil for example). Other reasons goods arent manufactured here include:
While there are many other reasons we will stop here for now. The graph below shows the Rand-US Dollar exchange rate since the start of 1998. And in short a currency is like a measure of confidence the rest of the world has in a particular country. The stronger the exchange rate the more confidence the world has in a particular country. And as the graphic shows in South Africa confidence in this country has been on the decline for many years.
In 1998 the exchange rate was around R4.60 a US-Dollar. By end of August it was around R16 a dollar, and as at 18 October 2022 it cotsts R18 for a dollar. There is no clearer indication than this that the rest of the world has little to no confidence in South Africa, its economic growth, its policies, its electricity supply, its infrastructure, its government's ability to pay its debt and delivery public services.
- Restrictive labour laws (its difficult to hire and fire people in South Africa, compared to the rest of the world. We can thank labour unions for this. So firms dont want to open up plants and factories here and then sit with restrictive labour laws and poor productivity and you cant get rid of staff easily or cheaply
- Lack of stable electricity supply. No foreign firm in their right mind would open up a manufacturing plant here if we cant provide them with stable electricity supply
- Poor infrastructure. Train tracks are ruined, and our roads are clogged up with trucks. If its not trucks its the millions of potholes. Not exactly ideal for a firm looking to manufacture and distribute goods
- Lack of technical know how. South Africa has experienced a massive brain drain and skills drain with skilled citizens emigrating due to crime, poor service delivery, high taxes with little associated public services, better job opportunities in other countries etc. Lack of skilled local staff leads to expensive skills that needs to be sourced elsewhere which would scare off potential firms looking to invest here
- High corporate tax rates. Higher taxes means lower profits, which in turn means less attractive investment opportunities
While there are many other reasons we will stop here for now. The graph below shows the Rand-US Dollar exchange rate since the start of 1998. And in short a currency is like a measure of confidence the rest of the world has in a particular country. The stronger the exchange rate the more confidence the world has in a particular country. And as the graphic shows in South Africa confidence in this country has been on the decline for many years.
In 1998 the exchange rate was around R4.60 a US-Dollar. By end of August it was around R16 a dollar, and as at 18 October 2022 it cotsts R18 for a dollar. There is no clearer indication than this that the rest of the world has little to no confidence in South Africa, its economic growth, its policies, its electricity supply, its infrastructure, its government's ability to pay its debt and delivery public services.
Rand-US Dollar exchange rate over time
So we have discussed why South Africa does not manufacture a lot of goods consumed by South Africans. So lets look at the impact of this and how the exchange rate feeds into this. So since there are various items South Africa cannot manufacture or mine or produce, we have to import them. That is something SA cannot do anything about. However other goods and services can actually be produced here if a conducive environment for manufacturing existed here. But since it doesnt, as we covered earlier we import a large number of goods used by every day consumers. Imported goods include:
You as a South African will be hard pressed to go a day without something that has been imported. And the weaker the Rand-Dollar exchange rate the more expensive the goods mentioned above becomes. Which means inflation will go up, which means to buy the same basket of goods over time becomes more and more expensive, so your money is losing its buying power.
So for this reason its critical to have either a strong exchange rate to keep import inflation down, or at least a stable one to minimize the effect the exchange rate has on the price of imported goods.
The flip side of a weaker exchange rate is higher Rand values received for goods exported. But in SA's case the bulk of our exports is raw commodities such as iron ore, coal, gold, platinum. While its great for the mining firms, the thing is very little of this benefit filters down to all South Africans. While a stronger exchange rate which leads to lower consumer goods prices will have a bigger positive effect on more South African consumers lives.
- Cell phones
- Electronic equipment such as TV's, fridges, washing machines
- Cars
- Cosmetics
- Cleaning chemicals
- Crude oil (which we refine to get petrol and that is used in our cars and trucks and busses and taxi's)
- Large and complex machinery and equipment used in mining and construction
- Clothing
- Footwear
- Steel
- Chemicals and dyes for paint
- Certain food stuffs such as soy
You as a South African will be hard pressed to go a day without something that has been imported. And the weaker the Rand-Dollar exchange rate the more expensive the goods mentioned above becomes. Which means inflation will go up, which means to buy the same basket of goods over time becomes more and more expensive, so your money is losing its buying power.
So for this reason its critical to have either a strong exchange rate to keep import inflation down, or at least a stable one to minimize the effect the exchange rate has on the price of imported goods.
The flip side of a weaker exchange rate is higher Rand values received for goods exported. But in SA's case the bulk of our exports is raw commodities such as iron ore, coal, gold, platinum. While its great for the mining firms, the thing is very little of this benefit filters down to all South Africans. While a stronger exchange rate which leads to lower consumer goods prices will have a bigger positive effect on more South African consumers lives.