South African rand in freefall

Tourists are benefiting from cheap living in Cape Town

The South African rand is in freefall. Nobody is quite sure why, or what the country should do to stop it, but as Alastair Leithead reports from Cape Town, it has the potential to undermine all the positive things happening in the South African economy.

It is becoming something of a joke among South Africans. To begin with they thought the radio and television presenters had read their scripts wrongly - the rand could not have fallen so far in a day.

The currency has been drifting gradually downwards all year, but in the last week it has taken a tumble so far that even economists do not know where it will stop - or how to go about slowing it down.

A Big Mac meal in the busy Cape Town McDonalds restaurant on holiday Monday cost R16.75.

Today that is worth about £1 - tomorrow no doubt even less.

Three weeks ago the same Big Mac meal was £1.20 - last year it was more than £1.60.

Some economists use the Big Mac as a true indicator of what a currency is worth. According to those rules the rand is massively undervalued.

And that is the strange thing - the interest rate in South Africa is much lower than it has been in the past, the growth rate is on track, things are looking good for the economy - but still the rand falls.

Tumble continues

Vaughn Webber is head of the equity dealing desk at Sanlam Investment Management in Cape Town - he sits staring at graphs constantly edging downwards.

Traders watch the rand tumble still further every day

"It is not a pretty picture," he said.

"The slide is continuing on a daily basis, we come in in the morning and then at 9am the speculators wake up in London and from then on it is one way traffic towards the lows at around 4 o'clock. It usually gains a couple of cents but never regains its losses."

The impact of the falling currency has not really been felt by the ordinary, mostly poor, South Africans. Food prices and petrol have gone up, but only slightly.

The effect on industry has been mixed, according to Colin Boyes from the Cape Town Chamber of Commerce.

"The exporters are certainly the winners. The losers are the ones who have to rely on imported goods - consumables, television sets and in time perhaps motor car parts. Given time these are all going to become more expensive. There will be problems down the track."

Drinking to success

One of South Africa's biggest exports is wine, and the weak currency is great news for business.

Alex Dale is 35 and exports 95% of the wine he produces at his farm in Stellenbosch not far from Cape Town.

"Being an export-focussed company then obviously the dividends are going to be high - it is a lucky break for us, definitely. Having said that, the largest component of our costs are imports - wine barrels and bottles from France and corks from California," he explained.

"Obviously my colleagues who do not export as much are struggling. The wine industry works on a cycle, but it is certainly a good opportunity for us to develop our business."

And the negative side of the rand's drop is close to home:

"My girlfriend's family are all wheat and cereal farmers on the west coast of South Africa and they are totally reliant on combined harvesters and tractors. The parts and new machinery has to be imported and the decline in the rand has affected them dramatically."

More for your money

For visitors to the country armed with pounds and dollars to spend, there could not be a better place to come on holiday, and the tourist trade is another booming industry.

The wine exporters are living well off the collapsing currency

But what has stumped the economists is why the currency is dropping through the floor.

Jac Laubscher, chief economist at Sanlam Investment Management, brings together a whole series of factors.

"I think there is a lack of faith in policy making in South Africa internationally - with its reaction to HIV/AIDS. There is some speculative activity going on, driving the currency down. And there are factors like Zimbabwe - the situation has deteriorated, but not to such an extent that it can justify this movement in the currency," he said.

"The thing has now got a momentum of its own."

Cheaper Big Macs

And as far as the future is concerned:

"I think business confidence will be influenced and also there is the possible inflationary impact which could lead to the raising of interest rates."

While the South African Reserve Bank is warning against panic and is hoping to ride out the storm, there are calls for action from many different quarters.

Some say the government should do more to restore international confidence, others say they should ask the IMF to step in and help shore up the currency.

Either way, it seems likely that for now at least the currency will continue to plunge ever downwards, and Big Macs will continue to get cheaper.