The very industries that should benefit from the rand’s slump are the ones being hobbled.
When South Africa’s rand fell to its previous record in 2001, it fuelled export-led growth that lasted until the global financial crisis. That isn’t happening this time.
More than four years of currency declines – to a fresh low this week – aren’t enough to offset electricity shortages, strikes and slowing demand from Asia and Europe that are pushing the economy to the brink of recession.
“Any competitive advantage South Africa may have got from a weaker currency is rapidly being given away through wage increases and higher inflation expectations,” Peter Attard Montalto, an economist at Nomura International, said from London. “Exports are also under pressure because of the slump in metals prices and output constraints that have arisen due to the lack of electricity.”
South Africa’s power utility has implemented managed blackouts on 99 days this year, the legacy of a decade of underinvestment in new generating capacity. Electricity rationing has forced mines and factories to scale back production at a time when rising wage demands boost costs and commodity prices plunge. A series of strikes last year that halted output at companies from Anglo Platinum Holdings to Volkswagen curbed economic growth to 1.5%, the slowest pace since the 2009 recession.
The economy shrank an annualised 1.3% percent in the second quarter, the first contraction in more than a year, as manufacturing fell into recession, the statistics office said on Tuesday. In the six years that followed the rand’s previous record low in 2001, annual growth averaged 4.7% percent.
The rand has been on a losing streak since 2011, partly due to South Africa’s mounting domestic woes and investor disenchantment with emerging markets. Pressure on the currency has intensified this year as the Federal Reserve prepares to raise interest rates, commodity prices that account for more than half of South Africa’s exports dive and the Chinese economy slows.
South Africa, the world’s largest producer of platinum and manganese, exports mainly raw materials to China, its biggest trading partner. Growth in export volumes more than halved to 2.3% percent in 2014 and compares with expansion of 9.4% percent in 2010, according to data from the central bank.
“The rand is one of the emerging market currencies that’s most vulnerable to economic weakness and policy uncertainty in China,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by email. “A more competitive rand is of little help to South Africa’s exporters when the underlying problem is a lack of Chinese demand and mounting concerns about the credibility of Chinese economic policy. This is an extremely bleak external backdrop for commodity currencies.”
While the rand is down 11.7% against the dollar this year, eight other emerging-market currencies have fared even worse.
The rand tumbled as low as 14.0682 to the dollar on August 24. Investors typically turn to South Africa’s stock market as a rand hedge when the currency weakens, but the FTSE/JSE Africa All Share Index fell the most in almost seven years on the same day.
President Jacob Zuma has provided little leadership on the economy as he remains embroiled in corruption allegations related to misspending of public funds on his rural home. Several state-owned companies, including power utility Eskom Holdings SOC Ltd, are in disarray amid management upheavals.
Policymakers have limited room to spur the economy. Finance Minister Nhlanhla Nene is raising taxes and curbing spending to help keep debt under control and avoid a credit- rating downgrade. The Reserve Bank is under pressure to continue raising interest rates to contain inflation largely being driven by the weaker rand. The bank, which expects inflation to peak at 6.9 percent in the first quarter of next year, raised its benchmark rate last month for the first time since July 2014.
South Africa will need a pickup in global demand before it will see any improvement in economic competitiveness, said Hugo Pienaar, an economist at the University of Stellenbosch’s Bureau for Economic Research.
“Foreign demand, especially from Europe, is particularly weak,” he said by phone. “Domestic input costs have increased. The combination of those two factors mean that we have not benefited fully from the weak rand.”