Economists are divided on their predictions about the future of the South African Rand (“the Rand”).
Whilst some are positive and claim that a recovery should be expected in the value of the Rand, however; some contend that no recovery should be expected in the immediate future, at least for the next 5 years.
The positive side both of the weakening Rand and of the declining prices in South African products abroad is a revival of the South African export business. However, whether this can offset the negative impact, primarily inflation, and the consequent weakening of domestic demand and the internal market, remains questionable.
The present situation of the Rand
Currently the Rand has a conversion rate of circa 14:1 in relation to Euro and 10:1 to United States Dollar. As unfavourable as the situation is, there remains a belief that the value of the Rand will depreciate further to 15:1 in relation to Euro and 11:1 to USD. It is further believed that no factors in the medium term are expected, which could help to stabilize the Rand.
Unlike in Turkey, in which the inflation of the Turkish Lira is accompanied by a over proportionate economic growth and therefor can be called as a “healthy” inflation, in South Africa this situation is missed.
The meaning to South African entrepreneurs and consumers
For South African entrepreneurs, the weakening value of the Rand could mean better business to exporters. To importers, losses in profitability are to be expected as the weak value of the Rand makes it expensive to import goods and services.
Furthermore, a weak Rand has a potential to attract foreign investment into South Africa. For example, as a result of the weak Rand, a foreign investor could elect to establish a manufacturing business in South Africa using local resources. Thereafter, since a weak Rand favours exportation, s/he may, as a result, choose to export such locally manufactured products.
Moreover, for South African consumers, the weakening value of the Rand could mean higher food prices and more indebtedness. A decrease in the value of the Rand is oftentimes attended by an increase both in the inflation and in the interest rate. When the Rand is weak it also creates space for bad debts – as consumers are more likely not to be able to service their debts.
Analysts claim that the Rand is at its worst level since 2008. It follows that practical measures need to be undertaken by the South African authorities to counteract the situation for purposes of maintaining the viability of the South African economy.
In any event, we are currently witnessing a situation where a substantial number of foreigners are starting to buy property in South Africa, thereby making good use of the decreasing value of the Rand.
by Andreas Krensel