Faster economic growth in South Africa could be export-led. There is no lack of global demand for the right goods and services, which could be delivered from South Africa with the right incentives to do so.
The most obvious incentive would be a consistently favourable relationship between the revenues realised from producing goods and services at home for foreign customers and their cost of production. From an exporter’s perspective and from the perspective of a local producer competing with imports, the wider the gap between exchange rate movements and inflation rates, the better for growth in output and incomes with more exported and less imported.
To encourage demand for our exports and discourage imports, the exchange rate should weaken predictably by more than the difference between domestic inflation and that of our trading partners. The weaker exchange rate movements compared with the differences in inflation rates, the better for competitive local production.
Ideally, the currency would weaken at a modest rate but also one that consistently exceeds a hopefully still modest rate of inflation. Indeed, a slow rate of currency depreciation is an essential ingredient for sustaining low rates of inflation, yet still allowing enough of a predictable gap between exchange rate weakness and local inflation to make exports and replacing imports a consistent driver of faster growth.
Big Mac index
Ever since the economy opened to significant inflows and outflows of capital in 1995, the rand has consistently had more purchasing power at home than abroad — as any tourist, local or foreign, would attest. South Africa is among the very cheapest destinations for foreigners — the 50th cheapest Big Mac cheeseburgers are to be found in South Africa. We pay the equivalent of about $2.78 for the dubious privilege, compared with an average of $5.79 in the US (20% tip strongly recommended but excluded from this calculation).
You would pay marginally less in dollars for your Big Mac in Egypt, India, Indonesia and Taiwan than in South Africa, while the most expensive are to be found in Switzerland, priced at more than 2.8 times their dollar cost here.
Switzerland struggles to maintain the competitiveness of its jewellery and watch manufactures and Alpine holidays in the face of safety-seeking capital flows that raise the cost of a Swiss franc and everything else in Switzerland.
According to the Wall Street Journal, the average price of a margin-enhancing and buzz-inducing cocktail in the US is now $13.61, equivalent to R225. Your local speakeasy will charge you half as much, if that.
However, this ratio between the foreign exchange value of a rand and its purchasing power equivalent has been a highly variable one. Since 2000, the rate of inflation in South Africa has been 2.4 percentage points a year faster than in the US on average, with minimal volatility.
The rand has consequently weakened by an annual average of 5.8% against the dollar, providing a generally competitive exchange rate but a margin with very high volatility. That has made the budget calculations of exporters and importers most uncertain. A highly variable real exchange rate is not good for sustainable business. We should hope for less volatility.
Exchange rate instability
A purchasing power parity (PPP) equivalent exchange rate would fully compensate for differences in inflation rates between South Africa and the US. If the exchange rate (R3.60/$ in 1995) had simply compensated for the difference in local and US inflation since then, a dollar would now trade for less than R9 — about 54% of its current market value, roughly equivalent to the double we pay in rands for the goods and services we consume abroad.
This ratio of the market value of the dollar/rand to its PPP equivalent has, however, varied from a peak of 2.4 times in 2002 to a brief one-to-one relationship in 2010. That was a good time to have travelled, since thereafter Zuma-inspired threats to capital took the ratio back over two times by early 2016. It has remained similarly elevated and internationally competitive since.
Yet despite the stimulus of a competitive exchange rate, export volumes and revenues in dollars have been largely stagnant since 2010, following strong growth in the years before. And imports have kept pace with exports. Clearly other well-recognised forces have restrained economic growth generally, as well as limiting the capacity to export and compete with imports.
The case for export-led growth remains compelling; it just needs the right supply-side encouragement. A more predictable exchange rate, both nominal and a competitive real exchange rate, would be helpful. Very recent global events and their impact on the rand — a high beta emerging market exchange rate — have reminded us how unlikely that prospect is.
Low inflation itself can be a mixed blessing for exporters if it means a stronger real exchange rate. South Africa should seriously consider actions that would convince investors to support the economy with capital and learn to manage exchange rate instability and inflation without destabilising the real economy.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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