HomeFinancialImplications of a now likely rand-US dollar depreciation

Implications of a now likely rand-US dollar depreciation

RECENT political economy developments in South Africa have a direct bearing on Zimbabwe. The uncertainty over the continuance of South Africa’s Finance Minister Pravin Jamnadas Gordhan as the political head of SA’s Treasury portends a bleak economic scenario. This scenario is being fanned by the request by the independent crime-investigation arm of the South Africa Police Service for the minister to write a warned statement, sparking fears that he would be formally charged in the near future. It was quickly reflected in the fall of the rand against the US dollar by 6% from 13,46 to 14,32. This depreciation coincided with the fall of other emerging markets currencies following the announcement by the US Federal Reserve Bank (Fed) chairperson Janet Yellen that the Fed was strongly considering raising the interest rate on the back of a growing US economy. The rand’s tumble was much more pronounced than other emerging markets’, suggesting that the Gordhan saga lent a big hand in SA’s plunge.

The Brett Chulu Column

The issue is not so much about Gordhan — it’s about what he represents — prudent fiscal management of the SA economy in the face of a possible sovereign credit rating downgrade. SA was given a reprieve in June this year when the trio of credit ratings agencies Moody’s, Fitch and Standards and Poor kept SA’s dollar sovereign debt ratings just above the feared sub-investment grade or junk status. The escape was partly due to the SA Treasury crafting a credible fiscal consolidation strategy (government expenditure and debt reduction). Gordhan’s refusal to guarantee South African Airways’s much-needed fresh debt until a new board and financial statements are in place is highly symbolic of SA Treasury’s resolute commitment to fiscal probity. This firmness is a strong signal emitted to the credit ratings trio about SA’s commitment to continue on the path of fiscal probity. This credit ratings threesome is expected to do another round of credit rating in the last quarter of this year. It is precisely against this background that SA economists fear that the removal of Gordhan from the Treasury’s cockpit will be interpreted by the credit ratings trio as an indicator of a possible deviation from the path of fiscal prudence, resulting in a downgrade of SA’s sovereign debt to below investment grade. It is feared that such a downgrade will trigger a massive outflow of foreign funds from SA financial markets,pummelling the rand to unprecedented levels. Further credit downgrades are envisaged as interest rates are likely to be raised to tame an expected spike in inflation wrought by an extremely weak rand, further stalling the expected below 1% economic growth. Lower growth rates are not liked by credit ratings agencies as these indicate reduced capacity to pay debts as a result of low levels of revenue collection.

While other economists are warning of a precipitous fall of the rand to unprecedented levels, Annabel Bishop, a chief economist at the asset management firm Investechas, decided to put a number to that plunge — an unbelievable R30/US$. Ordinary Zimbabweans have a good understanding of exchange rates — our recent economic history has been a great business school. The fall of the rand is an economic phenomenon that even our grandmothers in rural areas understand. However, what is yet to be processed is the size of the social and economic impact that will be unleashed by such a stupendous fall that a few months ago was virtually inconceivable.

Two samples of effects that may be ushered by a precipitous rand plunge will be considered.

First, a R30/US$ level is likely to cause severe economic hardships in the high-density and rural households that receive support from relatives working in SA. A relative who is used to sending 1 000 rand home will wake up to the reality that in our economy dominated by US dollars, that rand sum will have dropped in value from US$71 to US$33. A sum of 2 400 rand to maintain the value of money they are used to sending will be needed.

Clearly, this reduction in value will cause a severe strain on households dependent on financial support from relatives based in SA. With an expected significant rise in SA inflation, interest rates and subdued economic growth, relatives in South Africa will find it hard to increase the rand remittances to compensate for the rand depreciation. We are likely to see a further fall in demand for goods in Zimbabwe due to reduced dollars in both rural and urban households dependent on rand remittances.

It is hard to argue against a further fall in Zimra VAT and income tax collections as a result of a fall in demand and an upsurge in job lay-offs. Statutory Instrument 64 of 2016 is most likely to come under pressure in view of the severely curtailed buying power of SA-dependent Zimbabwean households. It is envisaged that our government might be forced to either relax the import ban on basic commodities or increase the duty-free import allowance for individuals to enable Zimbabweans in South Africa to send groceries in lieu of money. If that doesn’t happen, SA-based relatives feeling the pressure and pain of eroded dollar value, monetary remittances will most likely want to send more groceries — if the government decides not to grant a reprieve, smuggling of groceries is likely to spike, further eroding customs collections.

Second, a R30/US$ will mean that SA goods will be trading at a massive dollar discount from the Zimbabwean importer’s perspective. South Africa is Zimbabwe’s largest trading partner, with about 70% of imports originating from our southern neighbour. Ordinarily, this huge discount should significantly lower Zimbabwe’s trade deficit with South Africa. Even after taking into account the expected rise in SA inflation ushered by an increased import bill in rand terms , the R30/US$ level still provides a huge scope to lower our import bill. This huge discount is unlikely to push importers to order more quantities than they are already importing. Even if importers decide to increase quantities they bring in from South Africa, it is unlikely that these quantities will be huge enough to trigger frenzied buying, most likely prevented by either current or new import restrictions.The overall trade deficit needs to be viewed in relation to exports to SA. Our exports will become more expensive for SA. Depending on whether our exports are substitutable by alternatives available to SA, a strong dollar might reduce our export earnings. If the Reserve Bank of Zimbabwe’s 5% bond-note export incentive is to work as espoused, then a huge export discount triggered by the envisaged precipitous rand fall will dilute the export incentive, slowing down the release of bond notes. In overall terms, the huge fall in the rand is likely to significantly reduce our trade deficit with SA.

The rand has dropped from R8,27 /US$ in 2009 to the current R14/US$. The R30/US$ descent is likely to be rapid. My prayer is that this external shock scenario doesn’t materialise, otherwise this Christmas will mark the beginning of a new dark chapter in our crippled economy.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal.

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