MTN deal announcement unseats the rand
We’ve all experienced some or other problem with our cellular service provider. Common complaints include billing errors, poor after sales service, dropped calls and ridiculous interconnect charges. Yesterday we learnt that cellular companies can put a dent in the value of the national currency too.
The rand lost 2.5% against the dollar just moments after local cellular giant MTN and Indian counterpart Bharti Airtel announced the unsuccessful conclusion of their merger talks. Although initially reported as a mutual decision the Indian telecoms firm was quick to lay blame for the deal’s collapse. “We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage,” said Bharti, referring to the inability of the South African government and National Treasury to “accept” the structure of the merger. Treasury has since distanced itself from these statements. The latest debacle marks the second failed merger discussion between the cellular giants. A first round of exploratory talks was called off in May 2008.
Cellular company smacks the rand
Why would the cancellation of a cellular company merger scupper the rand’s recent progress against a basket of international currencies? To answer this we return to the Economics 101 concept of supply and demand. Currency traders were backing the rand in the expectation of the huge foreign currency inflows to South Africa when the long awaited merger finally cracked the nod. A successful merger would mean billions of dollars in foreign currency flowing in to South Africa, creating strong demand for the rand and underpinning its value. Minutes after talks were called off these currency traders began ‘unwinding’ their positions in the knowledge the anticipated rand demand would not materialise.
Earlier this week the rand was eyeing the R7.38/$ level. Today you can snap up the world’s currency standard for a mere R7.59/$. And economists maintain that the rand is still too strong against its major trading currencies. Alwyn van der Merwe, director of investments at Sanlam Private Investments recently told us the rand should return to the R8.00 to R8.50/$ range over time. There are other concerns for the domestic currency. The August 2009 trade account recorded an R1.98bn deficit following three months of surplus. Trade accounts record the value of goods exported less the value of goods imported by the South African economy. In other words we imported more goods in August than we exported – partly due to recent rand strength.
Why a strong rand is not necessarily good for South Africa
There are pros and cons to a strong rand. The biggest plus point is undoubtedly the deflationary effect through lower import prices. With many of South Africa’s manufacturers and producers heavily reliant on imported inputs these price reductions quickly filter through the economy. The rand/dollar exchange rate is also a core component of the domestic fuel price – another major drive of overall price levels. So a strong rand is good from an inflation perspective. Unfortunately a strong rand impacts heavily on the country’s exporters. The prices of locally produced or grown products become less competitive on the global stage. With the economy already on the back food due to the ongoing recession the inevitable decline in exports is most unwelcome. Mining companies suffer similarly – with the recovery in commodity prices offset by the stronger rand.
Consumer woes continue
Local consumers have more to worry about than the level of the rand. Reserve Bank governor Tito Mboweni’s final Monetary Policy Committee meeting was dominated by concerns over the financial wellbeing of the domestic consumer, both individual and corporate. Although the governor announced an unchanged interest rate it’s clear the struggle with recessionary conditions is just beginning. The interest rate cuts announced since December last year are filtering through to the economy at a slower pace than expected.
A good measure of the stresses faced by consumers is the latest insolvency and liquidation statistics. Insolvencies of individuals are 17.2% down for the first seven months of 2009 (compared to 2008). There are some concerns that the recently introduced National Credit Act has rendered this measure inaccurate. In other words – individuals who may previously have declared insolvencies are under debt review instead. Stresses in the corporate sector are more noticeable. Total liquidations for the first eight months of 2009 are 29.7% up on the same period last year. Economists are concerned with the steep growth in compulsory liquidations.
Under these conditions growth in Private Sector Credit Extension (PCSE) is waning. The experts say we could even see a decline in credit extension in the second half of this year. And if that happens those sectors of the domestic economy that rely on credit for survival will come under increasing pressure.
Editor’s thoughts: A couple of months ago Vodacom successfully listed on the JSE. If you followed the news at the time you might remember the last ditch attempt by the Independent Communications Authority SA to scupper the deal. The Financial Mail has since reported on last minute (and thankfully unsuccessful) meetings between President Jacob Zuma and the chief executives of Vodacom and Telkom requesting the deal be halted at the last hour. Were you surprised that the Bharti MTN merger talks were scrapped? Add your comments below, or send them to [email protected]
