![Impact on Property Sector
• Relative to some other sectors, property likely to
be disadvantaged, especially in short run
– devaluation aims to enhance exports & import-
competing sectors vs. non-tradeables
– recent over-investment in property
– now, higher costs, reduced profits
• Medium-long term: higher economic growth will
support all sectors, including property
15 15
“There is a strong association between
[growth] acceleration episodes and trade.
Episodes are correlated with strong growth
in the economies of a country’s trading
partners, export growth, and a competitive
real exchange rate. Exports were also
facilitated by REER depreciations …. pointing
to the importance of careful management of
competitiveness regardless of the exchange
rate regime” (IMF, 2005, Sustaining Growth
Accelerations and Pro-poor Growth in Africa)
Pro-
16 16
8](https://image.slidesharecdn.com/exchangeratesanddevaluation-110617022953-phpapp01/85/2005-Exchange-Rates-and-Devaluation-8-320.jpg)
2005:Exchange Rates and Devaluation
- 1. Exchange Rates and Devaluation Presentation to RICS Botswana Keith Jefferis November 30, 2005 Structure • The mechanics of exchange rates • Exchange rates & competitiveness • Why devalue? • Impact of devaluation 2 2 1
- 2. Exchange Rates • Value of Pula determined in relation to basket of currencies (ZAR, SDR) with fixed weights. • Weights reflect trade patterns, changed rarely, kept secret • Exchange rate of pula vs. the basket can be changed (=re/devaluation, crawling peg) 3 3 Exchange Rates • Nominal Effective Exchange Rate (NEER) α β BWP BWP . =K ZAR SDR • weighted average of bilateral exchange rates • Bilateral exchange rates (e.g. pula-rand) move on cross-rates (e.g. rand-dollar) • Bilateral rate movements (BWP/ZAR, BWP/SDR) in opposite directions and cancel each other out – hence NEER constant - unless re/devaluation 4 4 2
- 3. 140 130 Index 1996=100 120 110 100 90 NEER BWP/ZAR 80 BWP/USD 70 60 50 2002 2003 2004 2005 5 5 Competitiveness • Real Exchange Rate – Relative domestic and foreign prices adjusted for nominal exchange rate Pd REER = f P . XR – Competitiveness declines (REER rises) if: • domestic prices rise faster than foreign prices • exchange rate appreciates – Botswana’s problem is the former 6 6 3
- 4. Real & Nominal Effective Exchange Rates 1995-2005 125 120 115 110 105 100 95 90 85 NEER REER 80 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 20 20 20 20 20 20 7 7 Inflation – Botswana and Trading Partners 20% 15% 10% 5% 0% -5% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Inflation Trading Partner Inflation (avg.) 8 8 4
- 5. Competitiveness • Botswana prices high relative to trading partners/competitors • Relative prices determined by costs of what is produced in Botswana (value added) • Botswana net costs (= incomes) high relative to value of what we produce • Costs have to be reduced either by reducing incomes or increasing productivity 9 9 Sectoral effects • Tradeables (exports or import substitutes) – includes, goods, some services – prices determined internationally – low profits/returns – investment discouraged • Non-tradeables – most services, property – prices determined locally (high) – high profits/returns – (over) investment encouraged • Wrong incentives! 10 10 5
- 6. Why Devalue? • Economic growth in Botswana MUST be export-led (small domestic market) • International/historical evidence very clear – e.g. China, E. Asia vs. Latin America • Must be competitive to export • Exchange rate a crucial determinant of competitiveness (along with domestic costs) 11 11 Impact of Devaluation • Doesn’t higher inflation erode the initial impact on competitiveness? – only partially – impact on inflation always less than 100% – e.g. 2004 devaluation of 7.5% added 2%-4% to inflation – 2005 devaluation of 12% added 4%-5% to inflation – some competitiveness gains remain 12 12 6
- 7. Impact of Devaluation • Initial (short-term): – Higher import costs (-) – Higher inflation (but small effect) (-) – Reduced real wages and incomes (-) – Profit squeeze in import-intensive sectors (-) – Profitability of tradeables sectors improves vis a vis non-tradeables (+) – Improved international competitiveness (+) – Higher government revenues (+) 13 13 Impact of Devaluation • Medium term – Support for exports and diversification – Support for higher economic growth, but – Devaluation a necessary but not a sufficient condition for higher growth – Need to deal with underlying cost factors – Crawling peg should eliminate need for further devaluations – Choices: compete or stagnate 14 14 7
- 8. Impact on Property Sector • Relative to some other sectors, property likely to be disadvantaged, especially in short run – devaluation aims to enhance exports & import- competing sectors vs. non-tradeables – recent over-investment in property – now, higher costs, reduced profits • Medium-long term: higher economic growth will support all sectors, including property 15 15 “There is a strong association between [growth] acceleration episodes and trade. Episodes are correlated with strong growth in the economies of a country’s trading partners, export growth, and a competitive real exchange rate. Exports were also facilitated by REER depreciations …. pointing to the importance of careful management of competitiveness regardless of the exchange rate regime” (IMF, 2005, Sustaining Growth Accelerations and Pro-poor Growth in Africa) Pro- 16 16 8