Positives to weak rand: analysts

Local manufacturers will benefit as the rand continues to fall against the United States dollar, analysts said on Friday (31 May).

“The positive part is that it should help our manufacturing exports. It should help our mines survive a bit better because their pressure is that commodities are not earning enough money… which I think is the main driving force behind the weak rand,” said economist Mike Schussler.

On Thursday, the rand fell to around R10 against the US dollar a few hours after President Jacob Zuma tried to assure the nation and investors that government was dealing with the instability in the mining sector.

The rand was at its lowest level in four years.

Schussler said labour issues partly drove the weak rand, but the main contributor was low commodities prices.

On the negative side, the weak rand would hurt ordinary people.

“The inflation rate is going to go up, and [so will] things like maize prices. While we do our own maize here, they are set in dollars. Also, 60 percent of the chicken is derived from the price of maize.”

The petrol price could also go up.

“If the rand does not improve, then next month it is quite clear that the petrol price could go up by about 40 to 50 cents a litre.”

The same would apply to diesel and paraffin, he said.

However, the positives could not be ignored.

“A weaker currency should help our GDP at least on the margin, on some of the exports… chicken farmers should be able to compete against imports with a weaker rand…” he said.

While the weak rand could yield some marginal growth, it would not help curb inflation.
Schussler had a different opinion on whether Zuma’s address had weakened the rand further.

“I would agree that it did not help. I don’t know if it made the situation worse… I blame a lot of things on our president, but not this one.”

He said it was clear that if the situation did not change, the rand could weaken further to R11 against the US dollar.

Riaan le Roux, head of economic research at Old Mutual Investment Group, said the rand had been weakening since August 2011, after going down to R11 against the US dollar in the 2008 financial crisis.

The rand recovered over the following three years, supported largely by massive purchases of government bonds by foreign investors.

He said factors putting pressure on the rand were the sharply widening current account deficit, which went over six percent of GDP, sluggish economic growth, failure to grow private sector employment, and an unstable mining sector, which also affected the country’s image for investors.

“All three rating agencies downgraded South Africa last year and unless the above situation improves dramatically, more downgrades are inevitable,” Le Roux said.

This would result in more capital leaving South Africa, he said.

However, Le Roux echoed Schussler’s view on the positives of a weak rand.

“It should lend support to companies exporting, and to companies competing with imports, as well as foreign tourism into South Africa.”

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Positives to weak rand: analysts