Streaming issues? Report here
money-show-thumbnailjpg money-show-thumbnailjpg
The Money Show with Bruce Whitfield
18:00 - 20:00
volume_up
volume_mute

Up Next: The Aubrey Masango Show
See full line-up
The Money Show with Bruce Whitfield
18:00 - 20:00
Home
arrow_forward
Business

There is some light at the end of the tunnel for South African importers

17 June 2020 9:16 AM
Tags:
Absa
growth
Lockdown
COVID-19
absa advertorial

Inflation expectations are declining, partly because the collapse in oil prices has been greater than rand depreciation.

Michael Keenan

This year the rand experienced its third major blowout.

Over the past two decades, the rand has on average depreciated by 3% against the dollar per year. This rate of depreciation is broadly in keeping with purchasing power parity (PPP) exchange rate theory, given that South African consumer inflation has on average exceeded US inflation by 3.5% since January 2000. However, on three specific occasions, rand depreciation has been particularly dramatic and far exceeded South Africa’s inflation rate differentials.

More specifically, in the wake of the September-11 attacks in 2001, the rand weakened by 39% to R13.84 (that is, 3.6 standard deviations above the long term rate of deprecation) in only three months. Then during the Global Financial Crisis of 2008, the rand weakened by 40% to R11.87 (that is., 4.1 standard deviations) also within a three-month period. Then again during the first quarter of this year, the rand depreciated by 28% to R19.35 (that is 3.4 standard deviations) in four months in response to the COVID-19 pandemic (Figure 1).

Being a free-floating liquid emerging market currency, with no capital controls for foreign investors, the rand is particularly vulnerable when these global event shocks rapidly erode investor risk appetite. The fact that foreign investors sold around R50bn worth of South Africa government bonds (SAGBs) in March, after a sub-investment sovereign downgrade from Moody’s Ratings effectively ejected SAGBs from the World Government Bond Index, merely aggravated the extent to which the rand weakened during the latest bout of global risk aversion.

However, the cost of hedging exchange rate risk is cheaper on this occasion.

It took the rand between 12-15 months to get back to its 5-year depreciating trend after the 2001 and 2008 crises. This implies the rand may only return to its long-term trend around mid-2021. Such a sluggish rand recovery bodes ill for domestic importers, especially because in the current economic downturn it will be even more difficult to pass on the higher input costs associated with the weaker exchange rate.

In response to the 2001 and 2008 rand selloffs, the South African Reserve Bank (SARB) hiked policy rates by 575bp and 125bp respectively. However, despite this year’s dramatic rand depreciation, the SARB has actually cut policy rates by 275bp to a record low of 3.75%. At this month’s Monetary Policy Committee meeting, the SARB reiterated that it would only respond to second-round inflationary effects. In other words, until there is clear evidence that this year’s dramatic rand depreciation is actually starting to fuel inflation expectations, the SARB is unlikely to increase interest policy rates.

In fact, inflation expectations are declining at present, partly because this year’s collapse in oil prices has been proportionately greater than rand depreciation. Moreover, in more recent years, the pass-through effect from exchange rate depreciation into overall imported inflation has halved, because weak economic growth has ensured that producers have less pricing power to pass on higher imported costs to consumers.

Meanwhile, US policy rates have only declined by 150bp this year to 0.25%, which means that SA’s interest rate differential over the US has narrowed to a 13-year-low of 350bp (Figure 2). Given that a forward exchange rate contract is equal to the spot exchange rate multiplied by the interest rate differential of the two countries concerned, the cost of hedging currency risk in South Africa has declined due to the SARB’s relatively aggressive cutting cycle.

Therefore, unless US policy rates move into negative territory and/or the SARB starts hiking policy rates, local importers will be able to lock in the cost of their future dollar commitments at levels that are relatively close to the prevailing spot exchange rate. During 2001 and 2008, even if importers wanted to hedge themselves against a rapidly depreciating currency, the premium they needed to pay to secure those dollars was well above the spot rate at the time, which merely added to the overall cost of the respective imported good.

Conversely, when SA’s interest differential over the US compresses, local exporters have to sell future dollar proceeds at lower levels relative to the spot exchange rate. As a consequence, exporters are likely to convert their dollar earnings sooner rather than later and in so doing, cap extended rand weakness, which would also be beneficial to the importer community. We conclude by highlighting that the current level of rand volatility is not as high as it was during 2001 or 2008, which means that the cost of hedging exchange rate risk in the options markets is also not as expensive as it was for importers in the previous two rand blowouts.

Michael Keenan is a Fixed Income and Currency (FIC) Strategist at Absa

Get the 10 most-read articles of the week from Bruce Whitfield’s The Money Show, emailed to you every Friday morning.


17 June 2020 9:16 AM
Tags:
Absa
growth
Lockdown
COVID-19
absa advertorial

More from Business

heinekenjpg

Heineken 'in discussions to protect livelihoods but at the same time save lives'

4 August 2020 5:36 PM

The company issued a statement this week following media reports that it has been forced to shut down production entirely.

Share this:
Read More arrow_forward

rumours fact-checking fact checking fake africa check 123rf

Facebook launches campaign in Sub- Saharan Africa to help spot false news

4 August 2020 3:21 PM

Facebook says the campaign will run online and ask users three questions to help stamp out false news.

Share this:
Read More arrow_forward

Ferrari

I collect cars. I’m a big Aston Martin and Ferrari guy - Vusi Thembekwayo

3 August 2020 8:06 PM

Bruce Whitfield interviews Vusi Thembekwayo about his attitude to money (hopes and fears, successes and failures, etc.).

Share this:
Read More arrow_forward

gay-couple-parents-baby-interracial-relationship-family-adoption-surrogacy-123rf

How to gain a sense of purpose and spark 'outrageous achievement'

3 August 2020 7:36 PM

"When your thoughts are centred around the meaning of your life, you unleash immeasurable power,” says author Richard Wright.

Share this:
Read More arrow_forward

TikTok 123rf 123rfbusiness 123rfworld 123rflifestyle

Microsoft wants to buy TikTok. Donald Trump gives it 45 days to negotiate

3 August 2020 7:23 PM

[EXPLAINED] The Money Show’s Bruce Whitfield interviews Craig Wilson, Editor at Stuff Magazine.

Share this:
Read More arrow_forward

Nigeria flag nigerian 123rf 123rfAfrica 123rfBusiness

Shoprite pulls the plug on Nigeria (pop 206m) – trouble for SA companies abroad?

3 August 2020 6:34 PM

Shoprite is exiting the oil-rich but spending-money-poor nation. Bruce Whitfield interviews Dianna Games (Africa At Work).

Share this:
Read More arrow_forward

Candle Eskom 123rf 123rfbusiness 123rflifestyle

Eskom wants its stolen money back – from Koko, Molefe, Singh, etc and the Guptas

3 August 2020 6:27 PM

The process to recover the looted billions has begun. Bruce Whitfield talks to Steven Powell, Director in Forensics at ENS Africa.

Share this:
Read More arrow_forward

kodak-filmjpg

Kodak shares soar as it pivots to manufacturing ingredients for Covid-19 drugs

30 July 2020 8:52 PM

Kodak's repositioned itself so well, its share price jumped by more than 30% after already surging over 1000% in two days.

Share this:
Read More arrow_forward

Retirement planning personal finance 123rfpersonalfinance 123rflifestyle 123rf

What does the contentious Regulation 28 mean for your retirement funds?

30 July 2020 8:23 PM

On The Money Show, finance expert Warren Ingram explains why he believes the pros of the regulation outweigh the cons.

Share this:
Read More arrow_forward

man-suitcase-travel-tourism-hotel-bed-room-accommodation-stay-getaway-123rf

Tourism industry welcomes easing of regulations, 'but we need to do more soon'

30 July 2020 7:38 PM

TBCSA CEO Tshifhiwa Tshivengwa responds to new measures that allow intra-provincial leisure travel and accommodation bookings.

Share this:
Read More arrow_forward