Band-Aids aren’t enough; we need reform – TreasuryONE’s Andre Cilliers

Currency strategist Andre Cilliers of TreasuryONE joins Alec Hogg in this week’s Currency Focus to discuss what South Africa will have to do to attract investors who decide to disinvest following the KZN unrest. Cilliers says one explanation for the rand holding firm (despite the riots) could be a delayed reaction from business owners. “I guess that’s got something to do with people needing to tally up the actual cost of the unrest – the reaction of businesses even when they get their insurance payouts. If they don’t open, it’s got a very negative effect on economic growth, a very negative effect on employment figures and just places the country further on a backward base.” – Claire Badenhorst

On the rand being under pressure despite strong numbers from mining houses: 

Well, if you look at the rand, then it is under quite a lot of pressure at the moment, and we have moved to the lower levels quite a bit. I would actually have thought that the numbers from mining houses and how well they’re doing would have done a little bit better for the rand – and it’s not. I would also have thought that with Mr Ramaphosa’s announcement last night that we move back to level 3 lockdown, and that they’re doing stuff to assist the economy through their tax incentives and delaying tax payments, and reinstituting allowances for the unemployed – I would have thought that that does a little bit better for the rand. So I was quite surprised this morning, and we literally just just missed the 15 levels. The mining numbers, as I say, trade balance figures, all still remaining quite positive, and yet the rand remains under pressure. So I’m a bit surprised.

On what has happened in the past month to the value of the rand (before the unrest in KZN):

Well, before that, we were very close to the 14 levels, just above the 14 levels, in the range of R13.90 to R14.20. Then came the new concerns about Covid-19 infections throughout the world – that placed economies a little bit on the back foot. But in our little world of South Africa, it was mainly the unrest in KwaZulu-Natal and it put the rand under pressure. I think we’ve spoken about that before, about the investor confidence that gets negatively influenced by that.

With that came the Reserve Bank last week that said that they’re going to keep interest rates as it is. And if you look at what the interest rate markets have actually priced in, they kind of expected the Reserve Bank to really increase interest rates by 25 basis points on the back of inflation that has breached mid-level of the target range of 3% – 6%. Now, the last figure, it did come down a little bit again, but slightly still above. I think people expected the Reserve Bank, in anticipation of an interest rate move, and what the Reserve Bank had also said in their press conference afterwards is that it was a unanimous decision not to increase it and that they do not foresee that they will move on interest rates this year and that they will maintain a fairly loose monetary policy in aiding the economy back to its growth. I think that also disappointed markets a little bit and placed the rand under further pressure.

On companies disinvesting following the unrest in KZN: 

When we spoke last week, we said that if you look at the rand – and we were looking at reasons as to why it didn’t move as much – we mentioned the fact that in previous occasions where there was negative news – and I take the appointment of a Minister of Finance for a weekend way back with Mr Des van Rooyen and the reaction of the rand then – then there was a far lesser reaction during this. I guess that’s got something to do with people needing to tally up the actual cost of the unrest and now in the aftermath, the reaction of businesses even when they get their insurance payouts – for those who do.

If they don’t open, it’s got a very negative effect on economic growth, a very negative effect on employment figures and just places the country further on a backward base in terms of economic growth and further increases the negative feeling from investors’ side. We could very well see that that’s got an impact on foreign investors as to how they react, whether they reinvest or disinvest, and at this stage, it looks more to the disinvestment side and that’s definitely very negative for the currency.

On how else we could attract money to the country (like through higher interest rates):

That could be something that’s in prospect because you would have to increase your interest rates quite substantially to attract investment back into the country and to try and lure people back into the country. But mostly that is always just money that comes into the bond markets and that’s hot money, as I call it, because just as easily as it flows in, it flows out. So what you really need is structural reforms to lure back investors on the long term and then you need to protect their businesses and you need to give them a safe haven, otherwise you will not be able to lure them back.

That’s not something that is very easy to attain, and I think the situation remains fairly unstable throughout the country in terms of this. Don’t forget that we have a fair amount of taxi violence in Cape Town, which also negatively impacts on the Western Cape and the economy. So all over the country, it’s still a very vulnerable situation, and we’re not seeing those structural reforms that we need. We’re seeing patches, you know, Band-Aid strips that are being put onto all the problems and that’s a problem.

On the outlook for the rand in the short and medium-term now: 

Well, the short to medium term does not look fantastically well, but we will have to see. We are now back down to level three. We are increasing our vaccination process, and I think the government is doing reasonably well on that end. We’ll have to see how that gels out in terms of economic growth and returning to growth, and we will also have to see what happens in the rest of the world. Of vital importance is what happens by the Federal Reserve and their comments on what they will do with interest rates and inflation and the likes of that out of Europe as well. I think that the rand is most probably – for the moment – on the upper end of it ranges, and I would foresee that in the short to medium-term, we could retrace back down to the R14.45/ R14.75 trading range.

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