The majority of people who don’t have a financial background or a strong financial education are hardwired to believe the paradigm that a strong currency is good for the economy while a weaker currency is bad for the economy. This couldn’t be further from the truth. On each side of the equation there are positive forces as well as negative forces that can hinder the economic outlook.
We often think of the Rand as being a weak currency because we’re looking at it versus the US dollar. We quietly forget that actually other major currencies like the Euro has been weakened, sterling has been weakened and also the yen has been weak as well. So against a basket of currencies the Rand has actually been quite flat and if we look at the YoY percentage change the Rand is actually slightly up against a basket of currencies over the past year. That’s another factor which tends to be ignored as focus is on the US dollar
Without further ado, here are five reasons why the Rand’s fall is good for the South Africa economy:
1. Good for exports
The theory says that if you have weak currency it means your exports are going to do really well and your manufacturing sector should be recovering. A weaker Rand helps South Africa’s exporters be more competitive and sell more of their goods abroad. Manufacturing production since the global financial crisis of 2007 has increased by about 13%. Despite China economic slowdown we can see that South African exports are trading well above it’s mean regression line because even though China may be South Africa’s largest trading partner, South Africa is a well diversified economy.
We have to keep in mind that up until 2010 the USA was South Africa’s largest trading partner, and it continues to play a major role in the economy. Currently the USA is the main driver of global growth.
2. Good for Tourism
The drop in the Rand value has made South Africa one of the top world holiday destinations for foreign tourists. As a foreign tourist in order to purchase goods and services within South Africa you have to exchange your national currency to South Africa Rand so you can pay for these goods and services. A weaker Rand means a higher purchasing power for foreign tourists which is a big incentive for tourists to spend more which ultimately benefits the local economy.
Tourism remains a key component and at the same time makes a big contribution, not just to the world GDP, but to South Africa’s GDP because it creates jobs and foreign exchange earnings. Based on the latest statistics released at the end of March 2015, in 2014 South Africa received more than 9.5M foreign tourists up 6.6% from a year earlier and also tourism contributed R103,6 billion (2.9%) to the GDP.
3. Lowers the trade deficit
In the short term, a weaker Rand has some strong benefits like lowering the trade deficit. Even though there are other major forces, like the slowdown in Global economic growth that are working on the opposite side thus widening the trade deficit, we can still see the benefits of a weaker Rand in that it keeps the trade deficit in a fairly balanced position overall.
Even the latest figures show the benefit of the weaker Rand as the trade deficit improved from 10.14B in August to 890M in September. Looking at the overall trend we are trading above its mean line.
4. Boosts Job Growth
Another benefit of weaker the Rand is the job creation. This is most visible in critical sectors like the manufacturing sector as well as in the tourism sector which created more than 250k jobs and has generated more than $1.5B revenue to the local economy.
5. Investing Offshore becomes Attractive
Another main component of a weaker Rand is the benefit it brings if you’re investing offshore. In this situation, a weaker Rand is in your benefit because once you bring home your offshore investment returns you get more money from the currency exchange fluctuation when you convert your offshore investment returns from the stronger foreign currency into ZAR.