Written by Jeffrey Cammack: Published: November 8, 2015
A Weak ZAR Is A Good Thing
The majority of people who don’t have a financial background believe 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 ZAR as being a weak currency because we’re looking at it versus the USD. We quietly forget that other major currencies like the Euro, Sterling and the Yen have been weakened too. So against a basket of currencies, the ZAR has actually been quite flat, and the YoY percentage change the Rand is slightly up compared to last year. This is often ignored as much of the economic new focuses on the US dollar.
Here are five reasons why the ZAR fall is good for the South African economy:
Good for exports
If you have a weak currency it means the country will export more, and the manufacturing sector should be strong. A weaker ZAR 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’s economic slowdown, South African exports are trading well above their mean regression line, as South Africa has a well-diversified economy.
Until 2010, the USA was South Africa’s largest trading partner and it continues to play a major role in the economy. The USA is currently the main driver of global growth.
Good for Tourism
The drop in the value of the ZAR has made South Africa one of the leading world holiday destinations for foreign tourists. Foreign tourists exchange their national currency to ZAR to pay for South African goods and services, and the weaker Rand means a higher purchasing power for foreign tourists, which create an incentive for tourists to spend more.
Tourism is a key component of the South African economy and makes a big contribution to the GDP by creating jobs and generating foreign exchange earnings. Based on the statistics released at the end of March 2015, South Africa received more than 9.5M foreign tourists in 2014, up 6.6% from a year earlier and contributed R103,6 billion (2.9%) to the GDP.
Lowers the Trade Deficit
In the short term, a weaker Rand has the benefit like lowering the trade deficit. Even though there are other major global economic forces widening the trade deficit, we can still see the benefits of a weaker Rand keeping the deficit balanced overall.
The latest figures show the trade deficit improved from 10.14B in August 2015 to 890M in September 2015, keeping the trading above the mean.
Boosts Job Growth
Job creation is most visible in critical sectors, like the manufacturing sector, as well as in the tourism sector which has created more than 250k jobs and has contributed more than $1.5B revenue to the local economy.
Investing Offshore becomes Attractive
A weaker Rand has a benefit to those investing offshore. A weaker ZAR is a benefit because once you bring home your offshore investment returns, you get more money from the currency exchange fluctuation than you would have, should you have converted your offshore investment returns at a higher exchange rate.