Weaker rand reflects deep economic flaw

Graphic: Renjith Krishnan.

The rand’s slide to R9.1909 to the dollar at 5pm on Friday, down from R9.12 a week earlier, reflects a deep flaw in the economy. The sharp depreciation came largely on news from the Reserve Bank that the current account deficit widened to 6.5 percent of gross domestic product (GDP) last year, from 3.4 percent in 2011.

When earnings from exports of goods and services fail to cover the cost of imports, it can be a sign that something is seriously out of kilter in the way the economy works. Absa currency strategist Mike Keenan said the disturbing number highlighted “a structural problem that isn’t going to go away”.

Weak global demand for exports brought minimal growth in export earnings last year; but the need for capital inputs from abroad to feed the government’s infrastructure programme fuelled imports.

Figures in the Reserve Bank’s quarterly bulletin released last week illustrate the problem. In real terms – with inflation stripped out – imports of goods and services grew 6.3 percent last year, while exports rose only 0.1 percent.

Revenue data for January show the gap may widen further: the month produced a record R24.5 billion trade gap.

Keenan said the current account deficit led the rand by about two quarters and he forecast it would weaken to R9.60 by midyear. This means, even if the current account were to stabilise, there would be more rand weakness coming through.

There are those who see a weaker rand as a blessing. By making local goods cheaper, it gives domestic manufacturers a competitive edge. And better-than-expected manufacturing growth of 3.9 percent, year on year, in January confirms this.

Elna Moolman, an economist at Renaissance Capital, noted that some manufacturing sectors would benefit from a reduction in imports due to the weaker rand – less competition at home. But the higher price of imported goods – including oil – will eventually show up in their financial results. In addition, rising inflation could trigger a hike in interest rates.

Rand weakness can be self-perpetuating, as the prospect of a weaker currency will keep investors out of local investments. According to Citi, between Monday and Thursday, foreigners bought only a net R552 million worth of bonds and sold a net R2.8bn in equities.

The situation is only likely to reverse when the global economy gains momentum and demand for local exports recovers, according to Keenan.

With Europe in recession, much of the impetus would have to come from the US and China.

The latest data on US jobs and retail sales have been positive. Standard & Poor’s chief economist Jean-Michel Six last week predicted that the US would grow 2.5 percent this year, despite government spending cuts in January. However, others are less optimistic.

China’s growth target has been set at an unchanged 7.5 percent this year. But signs of weakness are still coming through. China’s official manufacturing purchasing managers index dropped to 50.1 last month from 50.4 in February.

So a surge in exports is not on the immediate horizon.

Moreover, a lack of demand for local exports is only part of the problem. Keenan noted that retrenchments lay ahead as the mining sector attempts to restore its profitability.

Strikes and protests will disrupt output again. And if violent, these would put pressure on investors to go elsewhere.

Over the past year, rand movements have correlated closely with domestic events.

The rand weakened sharply in March last year after a six week strike at Impala’s platinum mine in Rustenberg. And it weakened again in August when strikes started at Lonmin’s Marikana mine and weakness continued as agricultural unrest started in the Western Cape. The pattern is repeating itself this year.