TV Interview with SABC about Today’s Interest Rate Decision

I spoke to Francis Herd on SABC News’ Business Review last night at 8pm about the upcoming interest rate decision today.

The Reserve Bank’s in a tight spot. If they don’t raise interest rates, the rand weakens further (because the market’s pricing around 3 percentage points worth of hikes in the next year), and fuels inflation of particularly staple foodstuffs that impact low income earners and the unemployed, and we get more labour unrest and higher wage demands.

Either way, the economy is in for some tough times. It’s now up to the Reserve Bank to decide how they’re going to distribute gains and losses between different segments of society in the short-term. In the past three years they’ve implemented policy that favoured middle to high income people who take on secured debt (the wealthy), let’s see if they decide to switch in favour of supporting pensioners, low income earners, and the unemployed for a change by raising short-term interest rates further and purging the accelerating price inflation out of the economy.

It’s anybody’s guess, really. I’m of the view they should surprise economists again by hiking today, but I doubt they’ll do this. So most likely we see an unchanged decision. YouTube of the interview follows the link below.

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Weak Rand Harms Companies That Serve SA Consumers

A weak rand policy benefits companies operating in South Africa that serve foreign customers, but harms companies either overseas or in South Africa who aim to serve local South African customers. This is how profits and losses are initially being redistributed in the current phase of rand weakness (which I warned about on many occasions, most notably in this interview debate with Coenraad Bezuidenhout of the Manufacturing Circle who in June 2013 said a weak rand “helps manufacturers live to fight another day.”)

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Surplus vs Deficit EM Currency Performance

Great chart by Goldman Sachs brought to my attention by colleague Gareth Brickman. Deficit currencies getting hammered, which I’ve been warning about for ages. It should be the SARB’s job to prevent imbalances from building in the economy, and avoid blow-off currency weakness and interest rate hikes as we’re seeing at the moment.

Dem Stones

Live by the stone, retreat quickly in your cozy SUV by the stone. Or something like that.

Last week COSATU’s Communist-in-Chief Zwelinzima Vavi got pelted by stones by disgruntled mine workers.  Considering the violence perpetrated by COSATU members in the past, we can at least rest assured that the law of sowing and reaping has not deserted us.

But the whole Vavi/stone thing reminded me of this November 2009 open letter to Vavi by

Vavi’s Stone


Dear Mr Zwelinzina Vavi,

We read with great interest today your (Cosatu’s) policy recommendation about what would be a more appropriate level of exchange for the Rand. According to the reports you feel the Rand should be at R10 to the USD, which would “give the manufacturing sector a breath of fresh air.”

This makes us curious: Why should we stop there? Why don’t we take it even lower, to R20 to the USD? Let’s rather give our manufacturers a breath of opium infused oxygen! Won’t this take us right out of recession?

As you say: “we are going to be seeing massive net job losses in 2009…we estimate that more will be lost between now and December to make the number way above a million.” Hmmm, mulling over this comment of yours, we can’t help but fear that if we don’t go big we should rather be going home. Perhaps we should take the exchange rate to R100 to the USD in January 2010. No! Why don’t we take it there today?

The following year we can take it even higher, we can take it to R200 to the USD, for this would surely boost growth and create jobs again. This is just genius, the faster we get the Rand to go down, the faster we can boost economic growth and create jobs. We can get exponential on this and look back at our economic growth on a logarithmic scale. If you’re not smiling with a 0.9% quarterly GDP growth rate, would a 50% monthly GDP growth rate get a crack in the cheek out of you?

Mr Vavi, what is good for the economy in small doses, should also be good for the economy when given in larger doses. This must be made crystal clear. Either you are being fed protectionist policy prescriptions by your advisors, or you don’t understand the basics of economics. You have not found the economists version of the philosophers stone. You have merely found the same stone that politicians so love the world over: their own printing press.

But as economists of the Mugabe school and the Weimar school will tell you, taking the currency lower through intervention not backed up by productivity gains will end in tears.

Yours Sincerely,

JGalt & Freeman

Human Action

When you throw the ‘inflation stone’ all you’re likely to end up getting hurled back in your direction are actual stones.

Rand Weakness Owed to Excessive Money Supply Growth, Not Strikes

The Rand is weakening dramatically at present. In the past two weeks the $/R exchange rate has climbed from 8.20 to 8.61 this morning. The media and talking heads are blaming this Rand weakness on ongoing strike activity.

This is typical of people who do not understand economics to clutch onto anything that is topical at the time to blame Rand moves on. Why is it that while Marikana was happening, the Rand was resilient and even while strikes continued thereafter, actually strengthened?

There are fundamental reasons for why the Rand is weak presently. On September 10 my colleague Russell Lamberti wrote to ETM Analytics clients regarding the Rand outlook (I am cutting a long story short):

On balance therefore we are cautious of long rand positions from a cyclical strategy perspective.  Longer term (2-5+ years) we see the continued destruction of major fiat currencies and prefer holding EM currencies and hard commodity currencies like gold.  However in the short to medium term South Africa’s currency management leaves much to be desired and places considerable pressure on the exchange rate on a structural basis.  A reversal of capital account inflows is likely to hit the currency very very hard indeed.

I have written on numerous occasions about the poor management of the Rand money supply by the Reserve Bank, see here, here, and here.

Earlier this week, I sent the following chart to ETM Analytics clients. It depicts the interplay between the USD-ZAR and demand and supply of the ZAR.

Regarding it, I wrote

Noting the chart below (ZAR vs Money demand/supply), the evidence is clear: During periods when Rand money supply growth far outstrips net portfolio inflows, (i.e. Rand supply exceeds Rand demand) the Rand weakens, and vice versa. The period from late 2004 to early 2009 was a time when Rand money supply growth was outstripping portfolio inflows. In other words, demand for Rand did not match supply growth. As a result, the USD-ZAR trended higher from lows of 6.00 in late 2004 to a peak of just over 10.00 in early 2009.

This contrasts with the period from early 2009 to mid-2011, when demand for Rand was more robust than Rand supply growth. Stated differently, portfolio inflows exceeded Rand supply growth, and a consequence of this was a strengthening Rand. The USD-ZAR moderated from 10.00 to lows of 6.50 in mid-2011.

However, since then, the fundamental outlook for the Rand has changed once again. Rand money supply growth has accelerated sharply in recent months, while portfolio flows have not kept up. Rand supply is growing faster than Rand demand, and it is not surprising to see that the Rand has already begun to weaken. The USD-ZAR has climbed from 6.50 in mid-2011 to levels of 8.50 in May 2012.

In conclusion, I wrote that

The dynamics of relative Rand supply and demand will establish direction for the USD-ZAR going forward. Should we see a period where Rand money growth remains robust (which is not unlikely following the recent interest rate cut), while portfolio inflows slow at the margin (as we have seen in recent months of August and September), the USD-ZAR is expected to continue to increase and could potentially breach levels of 9.00 toward year end.

The bottom line is that the current sell-off of the Rand is a result of accelerating Rand money supply growth at a rate faster than USD, GBP, EUR supply, while demand for Rand has not kept up with the increase in supply. The fact that the USD has weakened against the EUR, while the ZAR has weakened against the USD, shows just how weak the ZAR really is. The SARB’s mismanagement of the Rand is going to cost us much higher prices of goods and services going forward.