Pain in store for most of the economy

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BR Retail 5860[1] Independent Newspapers Shoppers eye the goods at a Mr Price outlet at Chris Hani Crossing in Vosloorus, Gauteng. Some clothing retailers have indicated that if the rand remained at current levels, double-digit price increases would be unavoidable in the second half of the year. Photo: Simphiwe Mbokazi

Johannesburg - The sustained weakness in the rand against major global currencies such as the dollar, sterling and euro will have implications for most sectors of the economy and is expected to make already tough economic conditions even tougher for consumers.

Clothing retailers have indicated that if the rand remained at current levels, double-digit price increases would be unavoidable in the second half of the year. The prospect of significantly higher import prices is encouraging most retailers to look to local sources of supply.

While in theory the weaker rand should lead to a reduction in imports and an increase in exports, commentators point out that a number of factors will prevent exports from benefiting fully. These factors included subdued demand in South Africa’s traditional trading partners – in particular Europe, where government measures to boost economic growth have had limited success.

In addition, import parity pricing by companies that are dominant in their markets, such as Sasol and ArcelorMittal South Africa, will force local manufacturers to pay significantly higher dollar-based prices for critical intermediate goods. A related factor is the impact of critical inputs that are priced in dollars, such as oil and petrol.

Coenraad Bezuidenhout, the executive director of the Manufacturing Circle, also pointed out that high increases in administered prices were a restraining factor.

Bezuidenhout said that while there had been improvements with regard to electricity pricing, a major challenge remained the security of supply for electricity and water.

Trade and Industry Minister Rob Davies has welcomed the rand’s weakness. A spokesman for the Department of Trade and Industry (dti) told Business Report yesterday that the major challenge on the currency front was volatility rather than weakness.

He said that while there had been some contraction in manufacturing capacity in 2009, it had emerged “reasonably unscathed” from the recession.

“The array of dti incentives has helped companies to keep their heads above water.”

A critical aspect of those incentives has been to ensure that support is conditional on increased competitiveness.

“While a major focus of government incentives has been the motor industry, the dti has also been closely involved in the clothing and textile sector.

“Over the past three years it has provided approximately R2.3 billion in incentives aimed at boosting productive capacity in the sector. We’re not quite out of the woods but the industry has emerged with its capacity relatively intact and its competitiveness has improved.”

A major beneficiary of the dti’s incentives has been Seardel, one of the largest clothing and textile manufacturers in the country.

In its most recent annual report, the Seardel board acknowledged the importance of the dti’s incentive programme, which provided the company with the “ability to modernise and upgrade” its facilities, adding “no doubt these programmes have had success in sustaining jobs which otherwise would have been lost”.

Ronnie Stein at Foschini, which has done the most among the major clothing retailers to promote local sourcing, said the slump in the rand would affect the group only in the next summer season.

The group had hedged its currency exposure for its winter range, “but if the weakness continues, all the clothing retailers will be looking at double-digit inflation in the second half of the year”.

Stein said 65 percent of Foschini’s clothing for women was made in South Africa, but because a lot of fabric had to be imported it would be difficult to avoid increased costs. “We are constantly working on increasing our local sourcing.”

Edcon, which has considerably less reliance on local sources, is looking at ways to increase its supplies from local and regional producers. - Business Report



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