Rand hits a four year low

The rand has dropped to a four year low against the dollar today (22 August) after wage talks in the gold sector came to a halt.


According to reports, an impending strike would inflict more damage to the country's economy that is already losing $60 million (R615 million) a day due to the strike by the 30 000 workers in the car manufacturing industry.


According to Rob Spanjaard, director at Rezco Asset Management, the rand is hovering around the R10 to the dollar once more,  due, due to a number of factors including the impact of pending quantitative easing in the United States and better-than-expected retail sales data out of the U.S.


In October 2012, Spanjaard warned that the rand could end up collapsing to more than R10 to the dollar.


The aftermath of the rand’s recent performance
But not all economists feel the rand’s recent performance is an indicator of doom and gloom. Dr Azar Jammine, chief economist at Econometrix, said that following the steep depreciation of the rand over the past year, analysts have been impressed by the subdued extent to which inflation has responded in an upward direction.


“On previous occasions when the rand depreciated sharply, the impact in terms of pushing up inflation has been fairly dramatic. This has not been the case with the depreciation of the currency over the past two years. The difference this time is that the rand has, believe it or not, depreciated much more slowly since it first began doing so in a meaningful way in July 2011. It has taken more than two years for the currency to decline from R6.70 to the Dollar in July 2011, to its current exchange rate around R10. This magnitude of depreciation on earlier occasions outlined above took place in a matter of months,” said Jammine.


The impact of labour demands
Jammine added that there are concerns on the labour front that the fairly aggressive demands by labour for pay increases, might lead to significant wage inflation that gets fed through into higher consumer price inflation.


 “It is, however, not obvious that increased wages will necessarily translate into higher inflation. What really counts here is the extent to which the overall wage bill of companies increases. If substantial wage increases are awarded, but the employment component of such companies decline, then the average increase in the wage bill need not exceed inflation for the company materially and might then not be a source of increased inflationary pressure. In many instances this appears to be the case,” said Jammine.


He added that whether through attrition or active retrenchment, companies are succeeding in restraining the increase in their wage bill which will not necessarily mean an increase prices to compensate.