Negative headlines about the rand at the start of the week are exaggerated. That’s the message from TreasuryONE currency strategist Andre Cilliers, who explains why the rand has lost some of its recent strength against the US dollar. In this week’s Currency Focus, Cilliers told Jackie Cameron of BizNews that there has also been some good news in South Africa that is likely to play a role in strengthening the rand’s value.
Andre Cilliers on why there’s negative sentiment towards the rand:
What happened over the past week is that we got the inflation figures out of America and that missed the target again. Now, the initial reaction was sort of no reaction at all and the rand stayed stable and the dollar stayed stable. And then by the day thereafter, we saw that the dollar had actually gained some strength. Equity markets gained quite a bit on the back of that and on the back of the stronger dollar, the rand had retreated – and I want to say slightly, because, you know, R13.78, R13.65 – come on. If people want to start talking about the rand has now wilted and we’re losing its winning streak – I think it’s a little bit too early to say that.
It’s in reaction [to] the stronger dollar. Nothing to do with the rand. The rand still remains very much on the front foot. And people should stop looking purely [at] the value of the rand against the dollar. It’s the value of the currency against a basket of currencies. And you just have to look at the pound and you just have to look at the euro and you will see that the rand [has] not really lost a lot of value. Still strong, still doing well, and you can always expect that if it made a heck of a long winning streak, that you will see a little bit of profit-taking and it’s just sort of stalling a little bit.
On whether the news of SAA and electricity privatisation has made a difference to the rand:
I think in the medium term it will make a change. You must remember that the change on the electricity side for the one megawatt to the hundred needs to be legislated. It needs to be promulgated and that will be done within the next 60 days. If you look at that and you look at the expansion that could come from that, it would really stimulate investment into private power plants, if one can call it that. And that bodes well for the investment side and could attract quite a lot of investment, both locally and also from foreigners. And it would obviously, if we can sort out the electricity crisis, then it would sort out a lot of problems and it would stimulate long term growth into the economy. But it’s not something that happens overnight. As I say, it’s 60 days before it gets legislated and then it takes a while to build a power plant. And I mean, it’s not as if you can make the decision today and then tomorrow morning the power plant is up and running – but definitely very positive in sorting out these things. The same on the airline side.
Now, I’m not overly optimistic about where they get the investors from because that’s, as far as I’m concerned, pension fund money from state pensioners and state employees. So I’m not overly positive about that. But what is really, really positive is that the government is willing to give up 51% of the airline. So they are willing to take a back seat and put that into equity partners in a 51% to 49% partnership and that bodes well. That is a very big shift from government. And if that continues, that will once again stimulate growth going forward and it could attract quite a lot of foreign investment.
On the government still being too involved in SAA:
If you look at where the private partner comes into play from the SAA side, and you look at the link between them and the PIC, and the PIC and the government employees’ pension fund, then to me it’s a bit of a back door getting the money through other avenues. So it’s not direct taxpayer money anymore, but it’s now pension fund money from state employees. Ultimately, if those state pension funds run into problems, who will fund that bill? Then instead of funding the bill from SAA, you would be funding the bill or the shortfall from the pension funds. So I would have preferred to see an equity partner that is 100% private, that’s got nothing to do with the PIC. It’s got nothing to do with a government employee’s pension fund, and it’s purely an outside private equity firm or another airline company or whatever the case might be. But the important one is the way it’s done tells me that the government is willing to start looking at privatisation and start looking at taking a slightly more backseat to what happens in state enterprises and how they will be funded in the future and the impact that it will have on the fiscus. And that’s positive.
On the importance of Cyril Ramaphosa interacting with the G7:
I think it’s extremely important for Mr Ramaphosa to rub shoulders with people in the G7. That’s ultimately where a lot of money lies and ultimately where a lot of the investment comes from. And simply the exposure that you get by being able to be in meetings with them and having discussions with them exposes not only Mr Ramaphosa, but the whole country to a positive sentiment going through. And that once again bodes well for foreign investment. So I think it’s extremely important. And I think if you look at the whole political situation that’s currently playing out in South Africa, then I think that’s fairly well done and a very, very good PR exercise by Mr Ramaphosa. If you see the action that was taken with the health minister, Mr Mkhize, being put on to special leave, I think that all the right noises are being made, and I think he’s doing extremely well.
On whether this is good for the value of the rand in the long run:
I think it would all be good for the value of the rand. I think what needs to be kept in mind as well is that you would like to see some stability in the currency. And if I speak about stability then I’m saying it’s most probably better if the rand trades a little bit back and then a little bit down and then a little bit back and staying within stable bands, rather than gaining another one rand, which it would not be able to sustain, and then jumping up 3% and 4%. That instability is something that is difficult for both importers and exporters to work with. Ultimately, and I’ve said this for many, many years, if you have a stable currency, I can plan and I can change certain of my processes to work with what the exchange rate challenges are. It’s when you have this huge instability, either upward or downward, that it’s difficult and that most of your time and your business is determined by just what happens in the exchange rate. And it’s difficult to change your processes to make it more effective. So we need a bit of stability in the exchange rate and moving within more of a narrow band at this stage.
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