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In 1959, when the FM was first published, a single US dollar cost South Africans the equivalent of 71 SA cents.
Equivalent, because the rand itself was to make its appearance only in 1960.
We now have to pay about R15 for a dollar, or about 21 times more than we did back then.
But we also pay a lot more for everything else. In fact, the basket of goods that make up the consumer price index (headline CPI) has increased by about 93 times since 1960.
In contrast, CPI in the US is only up about nine times since then. That means average prices in SA have risen almost 11 times faster than average prices in the US.
Had the exchange value of the rand for US dollars simply tracked these different inflation trends, a dollar would now cost a mere R7.60.
This is known as a purchasing power parity (PPP) exchange rate and would have meant that a rand bought you now about as much by way of goods and services in the US as it might in SA.
Taking this long-term relationship between PPP and market exchange rates into account, the rand was most heavily undervalued in 1985, 2001 and 2016.
In 2010, it returned temporarily to almost its PPP value, using 1960 or 1995 as a starting point.
Thereafter the rand has been consistently undervalued, though to a highly variable degree.
In other words: the value of the rand has, on average, moved by much more than differences in inflation rates.
Readers might remember the rand’s spectacular blowout against the US dollar in 2001 — for reasons that have never been properly explained, notwithstanding a commission of inquiry initiated by former SA Chamber of Business CEO Kevin Wakeford.
Unfortunately, differences in inflation do not help to explain the behaviour of the rand over any period of up to five years or even longer.
It’s much more a case of the rand’s exchange value responding to forces that have been independent of inflation in SA, to which prices in SA then react.
The exchange rate leads and prices in SA tend to follow.
The question is then: if it is not inflation driving the exchange value of the rand from day to day or year to year, what does actually move our currency?
The major force acting on the SA balance of payments and the flows of foreign currency through the currency market is the trade in assets — not in goods and services.
The value of the rand responds to large and variable flows of capital — the buying or selling of financial assets across the frontier.
Such decisions reflect expectations of future returns or income.
So, the more attractive the return and growth prospects for owners of SA assets — like equities, bonds and real estate — the more capital flows in and the better the rand responds to these flows. The flows also have much to do with the strength of the dollar against its peer currencies.
Net financial flows from abroad have expanded dramatically since 2000. One way of reading this is that SA’s economy has become increasingly dependent on flows of foreign capital. South Africans have been funding their spending (lack of savings) by giving up, at a price, an increasing share of their assets (equities) and debts (largely RSA debt) to foreign owners.
These growing inflows of foreign capital after 2002 were linked to changing macroeconomic trends. At the same time, gross domestic savings began to fall well short of capital formation after 2002.
The relative shortage of domestic savings made for greater dependence on foreign savings to fund additions to the capital stock.
The rate of savings and capital formation in SA declined precipitously after 1980 and the gold booms of those days. But after 2000 capital expenditure has held up better than savings. That’s better for growth — but not for exchange rate stability.
As for capital controls, before 1995 and except for a brief interlude between 1983 and 1985, very strict controls on flows to and from SA were maintained.
These controls were lifted on foreign investors in 1995 and the flows of capital have since been enough to dominate the direction of the rand.
So what does the future hold for the rand and how should it be managed?
Firstly, expect consistent exchange rate instability and unpredictability.
In which case, domestic monetary policy should best ignore the temporary impact of exchange rate shocks.
Raising interest rates when the rand is shocked lower simply depresses demand and cuts growth prospects — which then discourages capital inflows.
Monetary policy should focus on managing domestic demand and ensuring that domestic spending neither adds to nor depresses prices. It should ignore exchange rate shocks.
Ultimately, though, the primary task for economic policy is to reduce the risks of investing in SA.
That way, the capital will come, the rand would strengthen and SA should grow.
• Kantor is head of the research institute at Investec Wealth & Investment
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