Johannesburg: Exporters are cheering the rand’s abrupt depreciation but the trend is unlikely to give the economy much of a boost, given the worsening global downturn. The currency’s weakness will also fan inflation, making it harder for the Reserve Bank to cut interest rates to boost flagging growth. Nonetheless, local industries that depend on revenue from overseas or compete against importers, hope their earnings will improve. If the rand fails to claw back recent losses, the benefits could be felt by the manufacturing, mining, tourism and food-processing industries.
"The bottom line is we’re very pleased to see this happening — it improves the competitiveness of local manufacturers," says Guy Harris, facilitator of the Manufacturing Circle, an industry group. "If sustained, the rand’s weakness should lead to increased investment in manufacturing in SA. It could make some projects that were unviable with the rand at R6-R7 against the dollar viable again."
The rand plunged to R8,47 against the dollar last week — its lowest in more than two years, and taking its depreciation against the greenback so far this year to about 18%. The weakness has been broad- based — it has depreciated by roughly the same amount against the euro and the pound in the year to date. Against a trade-weighted basket of currencies, the rand is about 19% weaker, according to Bloomberg data.
The speed of the rand’s slide, which is in step with trends in other emerging market currencies, has been disconcerting. Some analysts think the unit will stage a strong recovery in the next few months, but only if the world’s biggest developed economies manage to avoid sliding into a recession.
Shares, commodities and other assets seen as risky have been hammered in the past week, with global investors shifting into cash and top-rated government bonds.
"If this is a risk aversion episode and not a fundamental shift in terms of prospects for emerging markets, there is scope for the rand to recover in the next three to six months," Rand Merchant Bank economist Carmen Nel says. "But if there is a double-dip recession, then commodity prices will decline much more and the rand will remain relatively weak." Ms Nel sees the rand rallying to nearly R7 to the dollar by the middle of next year.
Yesterday, it briefly strengthened back below R8 before slipping back to R8,14.
Michael Keenan, Standard Bank ’s head of foreign exchange research, thinks the rand’s recovery will be short-lived. "The forces driving the rand weaker are still very much in play. There are growing fears that we are heading for a pronounced global economic downturn, if not recession," he says.
"I think the rand will incur a fresh wave of selling pressure. It could push through R8,50 and head for R9. The charts are telling us R9,20 or R9,50 are quite plausible."
The Reserve Bank said last week it had not factored the rand’s depreciation into inflation forecasts as it could be a short-term trend that would at least partially retrace. But if it stays at current levels, or weakens further, there will be upward pressure on inflation. Food and oil prices could rise.
Ms Nel believes inflation could be almost one percentage point higher next year and in 2013 if the rand does not recover. Other analysts have more modest forecasts, but inflation still looks set to rise further above the official 3%- 6% target range than most had expected.
Interest rate hikes are certainly not on the cards given slowing growth, but it will be hard for the Bank to justify cuts if the inflation outlook deteriorates markedly.
It would be a mistake to view the rand’s weakness as a solution to the lack of competitiveness of SA’s products, says Neren Rau, CE of the South African Chamber of Commerce and Industry. "It’s a fairly broad-based depreciation so there will be a positive impact in terms of our trading arrangements with developed markets," he says.
"While it is welcome, the weaker exchange rate does not determine success in markets. We hope companies will continue to pursue greater levels of internal efficiency." This would include better use of technology, efficient use of labour and the ability to position products in niche markets, he says.
* By MARIAM ISA
