SA needs a stable currency

Johannesburg – The South African economy has been faced with many uncertainties when it comes to the rand tumbling against all other major currencies. The plummeting rand has severely hit the resources and manufacturing industry as well as the economy at large. Certainly, this is not good for South Africa’s growth prospects as the country seeks to achieve a state of perfect balance between the owners of capital and the labour market.

This refers to the creation of value for the owners of capital, thus leading to more tax payable to the fiscus. The other narrative is that more job opportunities will be created, and increased incomes can be spent in the economy, helping to drive the economy forward. This requires an unwavering commitment towards developing an path with the objectives of boosting job creation and curb ping poverty.

South Africa’s manufacturing sector accounted for 15.2 percent of SA’s gross domestic product in 2013 – making it the third-largest contributor in that year.

Historical gains

History has it on record that, in the early 1920’s, the manufacturing sector was the most productive industry in South Africa. The main driver for this was government’s support in the form of the establishment of state corporations as well as the implementation of tariffs to protect the industry.

South Africa saw the establishment of the Electricity Supply Commission (Eskom) in 1923 and the South African Iron and Steel Corporation (Iscor) in 1928.

The devaluation of the South African Pound at the end of 1932 triggered significant industrial growth from 1933 onwards. World War 2 further stimulated the manufacturing sector by the demands of the war effort and the need to meet domestic demand in the absence of imported goods. After 1948, the growth in the manufacturing industry increased dramatically due to the government’s tight control over inputs.

This account of the historical events that have shaped the South Africa manufacturing sector for the better in the past serves as a reminder of the potential we have as a country. However, François-Marie Arouet argues, ‘there certainly is no useful or entertaining history but the history of the day. All ancient histories, as one of our wits has observed, are only fables that men have agreed to admit as true; and with regard to modern history, it is a chaos out of which it is impossible to make anything”.

Accordingly, one wishes to see a stable domestic currency, as it reduces all uncertainties relating to economic growth since it empowers businesses in every sector with knowledge that affords them an opportunity to plan their production schedules and reinforce their position on the international market stage.

The depreciation in the value of the rand should, and must have a positive effect to the country’s balance of payments. The rand depreciation has resulted in an increase in the value of exports due to domestic goods being relatively cheaper to foreigners, hence corporate profits in an export-dominated economy would grow, leading to a manufacturing boom.

Trade surplus

South Africa posted a R1.77 billion trade surplus in November of 2015 from an upwardly revised R21.60 billion deficit in the previous month, beating market expectations. It was the first trade surplus recorded in five months, as exports expanded by 10.3 percent while imports dropped 13.5 percent.

This was possible as domestically produced goods were more affordable on the global market and imports would be relatively more expensive, hence the demand for South African goods abroad would increase and result in job creation. From this, it can be seen that currency depreciation increases the country’s competitiveness of its exports and subsequently the demand for labour.

On the negative, a weak currency tends to create uncertainty in the manufacturing sector, as manufacturers are most likely to push-up their prices by passing on the increase in the production costs over to the consumers, and this leads to an increase in the price of goods. The effect of this is a reduction in the real income earned by households, which will ultimately lead to a decline in the demand for all goods.

If the demand for imported goods proves to be inelastic, this means that there will be less money available in the economy for domestic products. Again, this will drive the economy into a contractionary state driven strongly by low income levels and poor economic activity as less money will be spent on domestic goods. The end result will be lower levels of employment than would have been the case had the demand for imports been elastic.

This sad state of affairs ultimately put companies within the manufacturing sector under tight scrutiny of the competition commission not to increase prices to make up for economic losses at the expense of consumers. Companies find themselves in difficult operational situations that often push them to revise their financial projections as they will be exporting their goods at a relatively cheap prices.

Saving costs

Companies also find other ways to save costs by retrenching in the long run due to the inflexibility of the labour market (in the short run). On the other hand one could argue that the decrease in employment could be the result of the stringent labour laws applied in South Africa and the inability of the wage rate to be market related.

What then becomes evident is companies within the sector opt to push up their prices so as to curb the instant demand of domestic goods. Lack of planning and execution by local producers who are not export-oriented may not increase their exports if they don’t see the weak domestic currency as being permanent thus taking advantage and increase their exporting ability.

An inflationary climate may result from currency depreciation, again this is supported by talks that the South African Reserve Bank is likely to increase the interest rates again this year. This occurs as consumers switch from relatively expensive imports to relatively cheaper domestically produced goods. This ensuing shift in demand for goods will push against supply levels and cause prices of domestic goods to increase.

A weak rand combined with weak global demand for local goods could be disastrous for the economy! However this raises concerns about potential severe currency weakness given the country’s credit spread that has widened appreciably in recent months. This uncertainty leads to a lack of investment injection towards the manufacturing sector as employment growth in the sector has rather been flat relative to resources and construction.

From the above it can be seen that exchange rate fluctuations have both positive and negative impact on the manufacturing sector. Yet, the focus should rather be on maintaining stability of our exchange rate and having sound macroeconomic fundamentals that enhance our international competitiveness in order for the manufacturing sector to grow.