Weakening the Rand will result in violent outbreaks nationwide

Politicians must be careful what they wish for.  Weakening the Rand to help exporters in the short-term will bring severe hardship to the vast majority of South Africans as their transport and food bills skyrocket.  If the Rand weakens 30%, expect the petrol price to catch up and be roughly 30% than it is today. The Rand is a numeraire, by weakening the Rand everything priced in Rand automatically rises.

In an environment of higher unemployment, a weaker Rand will result in violent outbreaks and public unrest nationwide as people on no, low or fixed incomes see their disposable income completely wiped out.  And as Gerald Celente likes to point out, “when people have nothing left to lose, they lose it.”  It is no coincidence that the Xenophobic outbreaks happened in May 2008 when CPI inflation was breaking above the 10% mark (denoted by black arrow).

That's when the xenophobic violence broke out.

That's when the xenophobic violence broke out.

To answer Moneyweb’s question: The Rand will shelter South Africans from currency debasement that is pushing oil prices higher abroad for as long as the Reserve Bank and Treasury don’t meddle with the currency.

A strong rand has protected fuel prices but for how long?

Fuel prices are up but it could get worse.

Malcolm Rees | 05 January 2011 02:57

JOHANNESBURG – Consumers will begin to feel the pinch after today’s petrol price hike but if it weren’t for a strong rand things could have been and may become much worse.

Petrol pump prices rose today by up to 29c a litre. The pump price for 95 grade unleaded petrol in the main inland commercial region is now R8.73 a litre, a 3.3% increase and the wholesale diesel price climbed 23.6c a litre, up 3.2%.

The increase was driven primarily by the rise in the international price of Brent crude oil, which is the accepted world benchmark, used to price the majority of internationally traded oil supplies.

Brent crude rose by $7.37 or 6.5% to $93.09 on December 30 from $85.72 per barrel on November 26 resulting in a 30.5c increase in the per litre petrol price while an adjustment to the petrol wholesale margin caused a further 3c price hike, according to a statement released by the Department of Energy.

However, a strengthening in the average rand/US dollar exchange rate to 6.901 over the same period compared to 6.9767 during the previous period, reduced the end increase in the litre price of petrol by almost 5c, said the department, resulting in a net average increase for ‘95 grade petrol of 28c.

According to a model developed by Tony Twine, director of Econometrix, a 10c increase in the rand price of a dollar translates roughly to a delayed 2c increase in the litre price of refined fuel and a 1 dollar increase in the barrel price of Brent crude oil will increase the litre price of petrol by around 7c.

The rand was valued at 6.646 to the dollar by 14:30 yesterday approaching recent highs which haven’t been seen since November 2007.  Its strong run against the dollar since mid-2010 has provided local consumers with significant protection against the rising price of Brent crude, which picked up steadily after hitting lows of $74.04 to the barrel on May 25 2010, at which time the rand sat at 7.83 to the dollar. Brent crude was trading at $95.45 by 14:30 yesterday.

According to Twine’s model, if the rand had been at 8 to the dollar in December consumers would, today, have had to fork out an additional 22c for a litre of petrol over and above today’s increase,  if it was at 12 to the dollar, today’s petrol price would be R1.02 higher at R9.75 a litre.

If the dollar price of Brent crude, as some economists predict, continues to rise, reaching $100 a barrel, consumers could pay around R9.95 a litre if the rand/dollar exchange rate is at R8 to the dollar, 14% more than the current price. At a rand/dollar exchange rate of R12 to the dollar we would be paying as much as R10.25 for a litre of petrol, 23% more than the current price.

Although Twine suggests that the probability of the current trend, in which the dollar weakens against both the rand and Brent crude, being replaced by a situation where the rand weakens against the dollar while the price of Brent Crude continues to rise is “less than 50%”, he notes that such a “dire” situation is not impossible.

Write to Malcolm Rees: malcolm@moneyweb.co.za

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Keep an eye on Chile to see how the public responds in time to their government’s new plan to weaken its currency by printing Chilean peso’s to buy US dollars. The central bank starts this plan today, and already the peso has fallen over 5% in two days.  Which means oil and food prices are now 5% higher than where they were at the start of the week.

Chile peso extends slide as intervention to start

Wed Jan 5, 2011 12:53pm GMT

SANTIAGO, Jan 5 (Reuters) – Chile’s peso CLP=CL fell 0.9 percent on Wednesday, extending a slide to hit two-month lows as the central bank was set to kick off a $12 billion foreign exchange market intervention later in the day to tame the country’s soaring currency.

The bank will launch its $50 million in daily auctions to buy pesos. Starting Wednesday, they will last until Feb. 9 in its first phase in a bet to tamper the peso that had gained over 17 percent since the end of June.

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4 Responses to “Weakening the Rand will result in violent outbreaks nationwide”

  1. Marc says:

    Govt cant do anything to weaken the rand. Maybe in a place like Japan or Brazil you can but for the rest its like pissing into the wind.

    • freeman says:

      Yes they can, it’s called a printing press and it is quite effective. Just ask Gideon Gono how it works.

      Step 1: Print ZAR
      Step 2: Use printed ZAR to buy USD
      Step 3: Repeat Steps 1 and 2 until desired result

  2. ad says:

    I see the money supply aggregates are starting to grow at a rapid clip of late. Sure there might be a little more demand out there but not to that extent. Do you think its just foreign inflows or is there some printing afoot for fx intervention?

    • JGalt says:

      Ad, just some observations from our side. M3 money supply growth has kicked higher to just above 7% y/y in Dec as a result of government deficit spending and an increase of net claims on foreigners (lending of Rand to foreigners).

      Government debt levels jumped 40% y/y in early 2010 to offset private deleveraging, this is what is now filtering through to M3 numbers. This type of public debt growth will not be maintained in 2011, so the impact on M3 will peter out. Private sector credit growth still remains weak. This needs to accelerate to boost M3.

      Also bear in mind that M3 growth was running at a clip of roughly 25% from 2006-08, so we are well off those growth levels which remains recessionary. Furthermore, foreigners perception to the Rand is changing and this keeps demand for Rand high and rising (Rand is up 2% against the Swiss franc since July). Yield differentials remain VERY attractive for foreigners. QE3 is coming and this will drive another round of capital inflows. Local businesses are also still uncertain about economic future and this keeps them sitting on cash.