If I had to single out my biggest bugbear, it would be those who unnecessarily complicate economics.

This reminds me of a golfer observing another golfer preparing to tee off, who happened to be using a left-handed club. The observing golfer turns to his playing partner and says: “As if golf is not already difficult enough, this guy decided to also play it left-handed.” The punchline, of course, is that the speaker ignores the fact that the golfer happens to be a left-handed. While left-handed golfers are not uncommon, they are not nearly as prevalent as right-handed golfers.

This brings me to my contention: a country’s exchange rate is, in essence, its share price. Granted, there are a number of exchange rates, but these tend to merely express the ‘share price’ of the different currencies. This notwithstanding, there tends to be a correlation between exchange rates – their valuation. For, if the rand depreciates against the US dollar, it tends to also depreciate against the British pound and other currencies, particularly the major currencies.

According to US News Money, there are five factors that determine share prices, namely market sentiment, growth expectations, valuation, momentum and central bank activity. Market sentiment tends to be unpredictable, and could be influenced by the performance of other companies in the sector. Growth expectations relate to the perception of a company’s growth expectations, compared with other companies in the industry, and expectations that the company’s managers are able to achieve their growth targets. Valuation considers a company’s price-to-earnings ratio. As for momentum, it could quite possibly be driven by emotion and perception rather than by the company’s actual performance. A central bank may well amend interest rates (that is, increase or decrease them), thus enhancing or impeding the company’s share price.

As for the factors that influence the exchange rate, www.investopedia.com identifies six: differentials in inflation, differentials in interest rates, current account deficits, public (sector) debt, terms of trade, and political stability and economic performance.

Concerning differentials in inflation, those countries that have higher inflation typically see depreciation of their currency in relation to the currencies of their trading partners. As far as differentials in interest rates are concerned, countries with higher interest rates tend to attract foreign capital, which causes their exchange rate to appreciate. Current account deficits, in turn, indicate that a country is spending more on foreign trade (imports) than it is earning (from exports) and that, as a consequence, it has to borrow capital from foreign sources to account for the deficit, depreciating the currency.

As far as public (sector) debt is concerned, countries engage in large-scale deficit financing to pay for public-sector projects and governmental funding. Should large debt prove to be a cause for concern for foreigners if they believe the country risks defaulting on its obligations, they will be less willing to own securities denominated in that currency if the risk of default is great. As a consequence, a country’s debt rating – as determined by rating agencies – is a crucial determinant of its exchange rate. Terms of trade, a ratio comparing export prices to import prices, also has a bearing on the current account and the balance of payments. If the price of exports rises by a smaller rate than its imports, the currency will depreciate in relation to the currencies of the country’s trading partners.

As for political stability and economic performance, investors seek to invest their capital in stable countries whose economic performance is strong, which leads to an appreciating exchange rate.

The similarities are quite evident between the factors that determine a company’s share price and those that influence a country’s exchange rate. In essence, these factors relate to the performance or expected performance of a company or country. In the latter instance, the factors can be summed up as the ability of a country to continue to achieve economic growth and to reduce its liabilities.

I am writing this column as the rand hit a 14-year low of R14.06 to the US dollar and R20.99 to the British pound, making the local currency one of the worst affected of its 25 emerging-market peers. This resulted in the South African Reserve Bank (SARB) issuing a statement to the effect that it would consider intervening in the foreign exchange market “to ensure orderly market conditions”. To be realistic, the central bank’s intervention might only be a symbolic gesture, as South Africa does not have the foreign exchange reserves to make any meaningful impact.

The performance of the rand is likely to lead to an increase in inflation above the SARB’s 6% target – this while South Africa continues to struggle with low economic growth, high unemployment and a substantial current account deficit.

The extent of the country’s lacklustre economic growth during the second quarter should be already known by the time you read this column. The I-NET BFA consensus for second-quarter gross domestic product growth was 0.8%.

The challenges and tribulations that South Africa is experiencing are the culmination of both external and internal economic factors – the making of a perfect (economic) storm. The external economic factors, one could argue, are not of South Africa’s making. But they are – since the South African economy has not been transformed in so far as diversification is concerned. South Africa is still, quite frankly, a commodity-dominated or commodity-reliant economy. As for internal economic factors, well, these, in themselves, offer ample explanation of South Africa (Pty) Ltd’s share price.

Steel Panel Rebate Provision
On August 21, the South African Revenue Service (Sars) informed of the insertion of a rebate item to provide for steel panels with an inner core of Portland cement, for the manufacture of elevated (raised) flooring systems for buildings.

Wheat and Wheaten Flour Duty
Sars announced on August 21, in terms of the variable tariff formula, of the reduction in the rates of customs (all rates of duty) on wheat and wheaten flour.