The rand fell to a five-year low in late trade to be bid at R10.8118 to the dollar at 5pm yesterday, falling 10c on the same day that Stats SA released lacklustre manufacturing output figures, indicating that the industry is not taking advantage of a cheaper currency, which should benefit exports.
Economists, however, say that in the medium term it is not all bad news for the South African economy.
Yesterday’s manufacturing figures were for November last year and the rand was not nearly as low then as it is now.
If the rand weakens further – and a moderate decline is broadly expected – the manufacturing and mining sectors may get a bit of a fillip going forward. On the other hand, a weaker rand is bad news for a consumer-driven economy as it is inflationary, pushing the price of imports and the cost of living higher.
Brian Kantor, an investment strategist at Investec, said the rand was weak “in line with a number of emerging markets. It is not South Africa-specific, there is a general move out of the emerging markets, especially in economies dependent on foreign capital like ours.”
While economists discounted the impact of President Jacob Zuma’s statement on Wednesday that the ANC was seeking a two-thirds majority in this year’s national election to allow it to change the constitution, Kantor believed the politics of Turkey, which has had a big impact on its currency, had caused ripple effects across vulnerable emerging markets and was a key ingredient in the rand dropping to R10.80.
Nomura emerging markets economist Peter Attard Montalto noted: “The move seems to be on a trickle of outflows on the equities and bonds side. Though nothing dramatic, it shows the current account funding vulnerability issue nevertheless.”
Pressed on why the manufacturing figures were not looking better in spite of the weak rand, which is supposed to benefit exports, Kantor cast the blame for this on the trade union movement. He pointed to the automotive sector, which had lost exports of 60 000 units last year because of industrial strife. In addition, the platinum mines, long hit by industrial action, were simply not producing at optimal levels.
One positive spin-off of the weak rand was that tourism figures – such as hotel stays – were sharply up because foreign currencies bought more in South Africa, Kantor said.
Azar Jammine of Econometrix said he was sure that in the first few months of this year one could be optimistic about the manufacturing sector taking advantage of a declining rand, which he said was likely to continue to weaken moderately going forward.
The lacklustre manufacturing data, which showed sales of manufactured products rising just 6.4 percent year on year in November, were a consequence of industrial action, and the rand had been trading at R10.20 to R10.30 to the dollar. “The rand has lost a further 7 percent since then. After the strikes [of last year], manufacturing also couldn’t just switch back on again,” Jammine said.
Nicky Weimar and Dennis Dykes of Nedbank’s group economic unit noted that manufacturing volumes increased by a seasonally adjusted 0.3 percent month on month in November, containing the annual growth rate to only 0.3 percent, down from 1.7 percent in October, “but only slightly weaker than the 0.6 percent increase the markets generally expected”.
Jammine drew solace from the gradual rand decline, pointing out that the decline against the dollar had not been as dramatic as on previous occasions in 2001 and 2008. In this round, the rand began depreciating in July 2011, “taking us from R6.70 all the way to R10.70 to the dollar… but it has been gradual”.
Previous drops had been more precipitous, taking the rand from about R7 to the dollar to R14 “in a short space of time” in 2001 – at the height of the Thabo Mbeki presidency. In 2008, it went from R7 to R12 quite quickly, in the year after Zuma conducted his internal ANC coup.
Jammine said that investors would start to see that the rand was undervalued. With government bond yields at 8.5 percent and the dollar at R10.80 “some will figure they can make money out of this”.
Devaluation of the rand was understandable in the context of low inflation in the developed world – at about 1 percent – while it was running at about 6 percent in South Africa.
“Even if the rand purchasing power remains unchanged, the rand/dollar exchange rate needs to depreciate by about 5 percent a year.” However, he did not foresee the rand “bombing out” going forward.
Kamilla Kaplan of Investec said the manufacturing production data was unlikely to have a bearing on the monetary policy committee decision later this month as the Reserve Bank continued to balance weak economic growth prospects against the upside risks of inflation.
“Interest rates are expected to remain on hold throughout 2014 and the currency will remain a key consideration for the Reserve Bank owing to the risks of the pass-through of the weaker currency to other prices,” she said.
Sean McCalgan, ETM’s market analyst, argued that one of the reasons for the poor manufacturing figures was that producers were quite heavily reliant on imported components “in their lines of production”.
Households were also under strain through over-indebtedness, high inflation, as well as unemployment. “To say the export growth should be benefiting in line with rand weakening is flawed,” McCalgan said.