Opinion: Is the stronger rand really a good thing?

Opinion: Is the stronger rand really a good thing?

Editor's note: Over the past couple of months, the rand gained substantial strength against the dollar for the first time in years. But, is it really a good thing for the South African economy?

Since the December election conference of the ruling party, which saw Cyril Ramaphosa being elected as the new ANC president, the rand started gaining strength, breaking below R13 a dollar.

With Zuma's removal and Ramaphosa's election as the new head of state, along with the re-appointment of finance minister Nhlanhla Nene, the rand continued to gain ground against the dollar, reaching below R12/$.

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Now, as expected South Africans were euphoric about the strengthening rand, because it means a stronger economy, right?

Well, not necessarily. Although the stronger rand might positively influence a lot of industries in the South African economy, some of the biggest sectors might not be as happy about it.

The impact of the rand on the mining, agriculture and manufacturing industries

Quartz Africa wrote that a stronger rand means lower revenues for commodities-driven economy like South Africa’s.

READ ALSO: Opinion: Honeymoon is over as SA's Ramaphoria dies

According to economists, the mining, agriculture and manufacturing sectors would likely suffer from the continuously strengthening rand.

This is because most of the companies' revenue is a combination of the dollar prices and the rand/dollar exchange rate, in addition to the costs that are rand based.

Taking the mining industry for an example. Since 2012, the mines shed about 70 000 jobs. and, experts predict more lay-offs will be inevitable if the rand continues to strengthen.

According to Rene Hochreiter, an analyst at Noah Capital, if the rand reached below R11/$, retrenchments will be unavoidable.

In agriculture, farmers who bought locally produced inputs and sold their products on exports markets benefited from the weaker rand. Now that the South African currency has strengthened, farmers would be seeing a drop in their revenues.

Those who invest abroad would also feel the impact of a stronger rand, because their offshore profits would be less in rand.

The positive impacts of the strengthening rand

South Africans had a rather grim outlook on the country's economy in recent years due to the weak rand. The boost in the currency's strength instilled a kind of confidence in consumers.

The weak rand spiked every day products' prices, as well as inflation. According to Jeffrey Dinham, an economist at the Johannesburg firm Econometrix, the stronger rand will boost consumer confidence.

This is because people see the drop in inflation and their money having more value. This would lead to South Africans buying more goods, which would boost the economy.

According to Dinham, a stronger rand also keeps transport and fuel costs down since South Africa is an oil importer.

The lower transport and fuel costs, along with lower inflation, keeps food prices lower.

At the end of the day the stronger rand has positive and negative impacts. But, the ideal would be for the currency to reach a sustainable level.

“I think the key is to have a stable currency. Stable allows people to make predictions, which helps boost confidence.”, said Michael Treherne, a portfolio manager at Johannesburg-based Vestact.

The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of Brieflyco.za.

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Source: Briefly.co.za

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