Why South Africa Needs A Strong Currency

Written: September 2003, Cape Town, South Africa.

It seems to me that the West requires South Africa's exchange rates to get weaker and weaker.

The benefit for this we are told is that:

However if one looks at the following 5 world's richest countries, one finds a different story. The countries are: Japan, USA, UK, Germany, Switzerland.

All these countries have:

So what does this mean for a country like South Africa

Why will this work?

All the countries with high mechanisation have low unemployment. Firstly, this is because these countries spend on educating their people first and also on importing people that they need to fill specialist jobs. South Africa keeps specialists away. I know of numerous examples of specialists who wanted to come and live in this country, but who couldn't get visas; or worse, people who came to live in this country who cannot work in their chosen profession where they might have studied for many years to earn a qualification. We are told that we have enough people to do the work already. But I believe that for every well qualified person who is attracted to this country, 100 other people will be guaranteed work. Secondly high mechanisation in factories means that more goods are produced which must be marketed, sold, supported, insured, delivered, repaired, maintained, etc, creating 1000's of downstream jobs (worldwide).

A strong currency means that raw materials can be imported cheaply and then converted into relatively expensive finished products. The biggest profits are made in finished goods, not in raw materials. South Africa selling its titanium to the USA to be converted into Catalytic converters for cars is a case in point. If South Africa made the Catalytic converters instead, we would produce 3 or 4 times the foreign revenue for our country as well as securing 1000's of jobs and other downstream activities. Many other South African commodities are also exported, eg iron ore for cars and ships; gold for Jewellery, etc. We are depriving millions of fellow citizens from work by doing this.

We are told that the weakening South African currency leads to more foreign income. However it is extremely inflationary as we saw at the end of 2001. eg Car prices went up 30% at the end of that year due to the massive Rand depreciation. So even with additional foreign income we get poorer because we need much more money to live in this country. Meanwhile our raw materials get even cheaper for the foreign countries and their companies and their profits go sky high. Note that car prices should have come down 50% since 2002 with the strengthening Rand, but they have not changed. Perhaps you should ask yourselves for the real reasons for this. At the same time, computer prices have halved and business productivity is shooting through the roof, because business that either couldn't afford computers or couldn't afford to upgrade or couldn't afford higher performance computers, can now afford all this.

Furthermore we are told that the weakening currency is good for local industry. This is garbage. Yes, it is true that local companies who export make more money and therefore higher profits for their shareholders, but most of their stakeholders are actually far worse off. Why is this, I hear you ask? The reason is that many exporting companies have relied on the depreciating Rand over the past 20 years to make more money instead of increasing efficiencies and productivity. We are told that South Africa has amongst the lowest productivity per worker in the world. It really doesn't surprise me. If we had increased efficiencies in the gold mining industry for example, we would now be producing much more gold per ton of rock that is drilled out of the ground. We wouldn't need to sell our mine dumps to Japanese companies who can still extract gold out of them. We would have a true downstream jewellery industry. And so on.

And lastly from a business point of view, it is far better to have a stronger currency, especially for importers and then also especially for exporters! You see, raw material costs go down. This means the costs of acquiring those raw materials goes down. This means that inventory costs go down. This means that the carrying cost goes down. Work in progress costs go down. Borrowing requirements go down. Interest payments go down. Interest Rates go down. End prices go down. In fact they go down so much that with a strong currency we should see massive reductions in many local prices even for companies who import a lot of their raw materials.

From the above analysis one can see that a strong currency is very good for economies. If you are a shareholder remember that a strong share price is good for business. The exchange rate between countries is a measure of that country's share price. I believe that once economists and business people see this relationship, share prices of local South African companies will increase when the exchange rate gets better rather than decrease as is the current situation. Note that share prices might be over-valued which means that perhaps they should decrease, but this is a different problem. When the American Dollar's value decreases their companies share prices also decrease. This is the opposite to South Africa where when the Rand's value decreases, our companies share prices increase!!!! One might say that the American Dollar decreases when people disinvest from American companies and move their money elsewhere in the world, ie the cause effect is the other way around. But the reason people disinvest is either because they feel the exchange rate will decrease thus making their investment less valuable or that the company won't perform as well as it has in the past. But in this second scenario, people could still re-invest in other American companies.

Core Concepts: 1) Exchange Rates; 2) Exchange Rate Requirements between countries.

David's Thoughts

David Lipschitz is the owner and managing director of Orbital Decisions®, an IT and IS consultancy in Cape Town, South Africa. He holds a Computer Science degree from the University of Cape Town (South Africa), a Computer Science Honours degree from Rhodes University in Grahamstown (South Africa), an MBA from Cranfield University (UK) and a Textile Diploma from the Cape Town Technicon (South Africa).

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