Learning to love the (stronger) Rand

Listening to South African public and financial sector economists recently wailing about the ’strength’ of the rand relative to major foreign currencies was infuriating. There will always be ‘winners and losers’ when a currency appreciates or depreciates, but when authorities intervene to force the currency in a predetermined direction (almost always to weaken the currency) it is blatant protectionism. It is as simple as that; it cannot be spun any other way. Some (exporters, debtors through the reduced real debt burden) are benefited at the expense of others (employees earning rands, importers, creditors). It is imperative that we also look at the long-term effects of a currency devaluation, and realise that a weaker currency cannot create wealth, and that on the contrary, has the opposite outcome of the one intended. The most important drivers of real wealth creation are productivity, savings, and capital accumulation. A weaker currency cannot improve competitiveness over the long-run.

David Rosenberg, chief economist & strategist of Gluskin Sheff (and former Merrill Lynch chief economist) wrote last week of similar responses coming from Canadians to the appreciation of their currency, in particular relative to the currency of its major trading partner, the US.

“If there is one thing that Canadians are never happy with (in addition to their local hockey team) it is the Canadian dollar. When it was flirting near that record low of 62 cents nearly a decade ago, everyone lamented the future of the Loonie and closer ties to the U.S. were being recommended from various corners of Bay Street. It was too expensive to buy anything that was imported, it was too costly to make that annual trip to Florida, and tickets to a Broadway play were prohibitive. We felt poorer. We must have been doing something wrong.

Fast-forward to today. Canadians are now fretting about a strong currency. After all, it is going to crush our manufacturing sector, kill our export base and undermines our domestic competitiveness. Even the Bank of Canada commented on how the strength in the CAD is dampening our growth prospects, cutting its medium-term GDP growth forecast.”

Is it just me or do these noises sound eerily familiar to the SA experience? Recall that SA in recent years suffered a massive ‘brain drain’ as young talented and graduated individuals left our country’s shores and rode the paper wealth gravy train in foreign financial centres such as London, the Middle East and New York. Now that these bubbles have burst, and thousands of South Africans are jobless and weighing up the possibility of returning home to ‘umshumi wham’ and ‘we will shoot to kill’, the first step of luring back talent is to set a platform of a stable currency that can be reasonably expected will hold its value, so that these folks can return and embark on entrepreneurial employment creating activities of their own. Nobody living in London or NY will be overly eager to return to a banana republic and continuous inflation. Luring back this talent and/or other talent is the only way that SA will head on a path of sustainable job and wealth creation. Human and physical capital flow toward places where savings and wealth is created, and debasing a currency is anathema to these capital flows.

“For Canadian businesses, the silver lining is that it will be easier to attract talent today compared to a decade ago when the Loonie was sinking. Call it the reverse brain drain. Whatever it is, it is a good thing from a productivity standpoint, which is the cornerstone to our standard of living. That is why I think we should embrace this new era of Canadian dollar strength as opposed to resisting it.” [ed. my emphasis]

Rosenberg’s research report is a must read. I have attached it below. Note the similarities between SA and Canadian economies in terms of economic structure, debt levels, currency moves and determinants, structure and drivers of equity market, default experience in banking sector, and recent foreign capital flows. This does not need to end badly for SA.
Special Report: Learning to Love the Loonie 102709