Perils and exhilaration of a strong rand: as we reported in last month's issue, South Africa is enjoying a boom even if the benefits are not evenly spread. But worries are growing over the effects of a strong rand. Tom Nevin reports.

Author:Nevin, Tom
 
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South Africa is currently experiencing what is euphemistically being called a mini-boom, although no-one's all that keen to say it out loud. Not only because of the small percentage of the population that are recipients of the flow of wealth, but because rocks and rapids lurk around every bend, threatening to transform the placid economic waters into sudden turbulence.

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And while South Africans look back fondly on the 2005/06 fiscal year, festooned as it was with surging commodity prices, world trade recovery, more cuts in domestic interest rates and nicely accelerating GDP growth, they'll also be anxiously keeping an eye out for such hidden shoals as the effects of high oil prices, the gilding coming off gold and the shine off platinum, and the stubborn, growth inhibiting, employment stunting, over-valued rand.

Noted one broker gloomily: "The rand thing is already happening."

After months of rollercoaster volatility, the South African rand has settled at a level where it is clearly overvalued, making exports, excellent quality though they may be, too expensive for foreign markets. The result is a slowdown in the manufacturing sector after earlier being boosted by increased consumer disposable income and the Christmas-season spending spree.

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Alarmingly for some, the South African Reserve Bank's response to the rampant rand was not to cut interest rates to force the rand's value down, but rather to buy US dollars and pay for the increased volume of imports with cheap foreign currency.

A consequence of the rand surge was to send importers on a shopping spree, buying overseas rather than home-grown goods, with the knock-on effect of a domestic manufacturing sector cut off at the knees by shrinking local demand and increased overseas competition.

The Central Bank's January gold and foreign exchange figures sent a clear message of its intention to use the strong rand to scoop up cheap dollars.

In November, the Bank bought in $126m; this increased to $664m in December and in January the figure had risen to $1.3bn.

The January splash-out rekindled the debate of how far the Bank should intervene to manipulate the strength of the currency. A strong rand plays a significant role in meeting the Bank's primary monetary policy of keeping inflation within a target range of 4%-6%, but it severely weakens such vital employment generating industries as mining and manufacturing and undercuts the government's mission to...

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